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inventory and other internal control our company and as we get started this emanated from discussion and a program we did last year on fraud and here at the beginning of today's session I'm going to take just a few minutes to kind of review the topic of fraud and the aspects of it to see how it connects and relates to the inventory and other internal control areas of the company we're going to talk about this afternoon so in the time we have together we're going to just briefly review the definition of fraud and talk about the fraud triangle and the behavior and warning signs for fraud and then we're going to get into the inventory management internal controls that you can develop and implement and the things that you should be watching out for when it comes to your company inventory and ordering systems and then we'll also get into other areas of internal control and a company will look at a briefly touch on payroll Council suitable you know cash coming in and then accounts payable casts going out and then we'll wrap it up with questions and answer session at the end as Lane said if you do have a question as we go along just type it in that box on the right and we will get to it towards the end of the program so first let's look at the definition of fraud is just as a reminder it's an intentional act meant to deceive others and either results in the loss to the victim and or the person committing the fraud achieving a game and if there's three legs to what they call the fraud triangle so it's a three-legged stool and if any one of these legs is missing then you do not have fraud occurring and the three areas are you got to have a motive or need you have to have a rationalization for committing the fraud and then there's got to be an opportunity to commit the fraud so what the neither the motive you've got a lot of external influences you might have a drug alcohol program the problem the employee or the individual could have some health issues they could be just not happy could be job dissatisfaction or there could be some other outside financial pressures that are outside the control of the person that they're dealing with they could be in debt over their head or something like that but that's the first leg is the motive and then you need the rationalization and the rationalization gets too okay well I'm just going to borrow the money you know I'm you know I'm just going to borrow this inventory that I'm stealing you know i'm going to replace it you know when i get a chance down the road after i get this money from the side side job that I'm doing or sale you know what I see the owner doing it how she gonna take materials out of the inventory what's the big deal I can do it too or you know what they still me and give me or you know Mike should be making more money than I am so they in this case would take the inventory or cash or whatever and that's their justification for it now of the three legs of the triangle the only one that the owners of the company have control over is the opportunity okay that's the only one that the contractor has the ability to control okay can't control the motive of the individual that's perpetrating the fraud or attempting to perpetrate the fraud you can't control the rationalization for it you can only control the opportunity and that's what we're going to talk about this afternoon is ways to minimize the chances for the fraud by controlling their opportunity to commit it so with the opportunity leg you know it's a matter of safeguarding your assets arm and you want to institute internal controls we're going to talk about those kind of things that are going to reduce the chances for fraud to happen five percent according to the most recent report to the nation's on fraud from the association of sort of like fraud examiners five percent of the US gross domestic product is lost in early to fraud that amounts to 820 billion dollars a year now you're sitting you know sitting here in this webinar this afternoon and maybe you're a one-man shop or you just have two or three trucks and you look at that number you say that Cheech and oh wow that's a huge number yeah I'm a small guy that does not impact me on my little company I'm not impacted by fraud I hate to tell you but you're wrong because the average loss do a fraud in a company with less than honor employees is a hundred and fifty-four thousand dollars now that's not just a fraud that occurs you know in in you know stealing fittings or inventory you know a lot of those involve um you know forging checks and those kind of things but the little companies in this case companies under on employees still are subject to fraud and then average fraud in the report hundred fifty-four thousand dollars now my question to you is this your company that does a million dollars in sales a year and you are a victim of one hundred and fifty-four thousand dollars in fraud how likely are you as a company to survive versus a company that say is 10 million dollars in sales that's why I fraud for the smaller companies has such a much larger in many cases devastating impact because a lot of the small companies that I know that do a million dollars in sales they might even be 15 20 25 years into the company into their their business if they have that kind of a mild hundred fifty two hundred thousand dollars built and owner's equity um you know that wipes it out right there so I guess my point there is I just want you to be aware of don't think it can't happen to you because it can very briefly as I just kind of said it's you know small companies are sucked up susceptible to fraud just as much as the larger companies are we do not as the smaller companies we do not have the resources that Koehler's and American standards and Moens have to set up systems and have the staff needed in order to separate the duties that will minimize the chances of fraud to happen and that's because we are so much smaller and have much limited resources it's more likely to be detected by tip is like how it's going to be found out more likely that you're going to have employee a telling you hey i saw employee be take three insinkerator disposals out of inventory last night and put them in his personal vehicle um so tip from a fellow employee or customer or supply house a vendor that's the most likely way that you're going to hear about fraud occurring and the biggest issue going back to 154 thousand-dollar number is the it says here nearly half of the victims they don't recover any losses that they suffer due to fraud and in most of the cases that I've been made aware of little if little to none of the money is recovered because the people have spent it you know if you've got a drug or alcohol program a problem or if you've got a gambling problem that money's all gone you know it's vanished into thin here um one last note on fraud it starts they all start small and they get progressively larger the longer it goes along now why is that the you know why is it the process well most people aren't too aggressive to begin with you know if you've got you know if you're not maybe locking up your inventory or you don't have cameras or something so so he says well you know I'm going to just take a garbage disposal or I'm going to take you know some handful of fittings it's not going to be not much just to do this little side job they won't care and they do it and they don't get caught they don't notice anything well then you start to get more emboldened it's the same way whether it's petty cash in the office or ordering things from the supply house you know maybe padding a invoice or taking money out your service technician or somebody in the office swiping a cash payment from a cup of customer those kind of things the more opportunity to have in the longer it goes undetected then they get more arrogant maybe isn't the best word but they do they start to get kind of cocky and will embolden hey okay look they didn't notice you know they're too busy with this or that and it goes on for a much longer period of time and typically they get caught because they get too greedy so just a couple red flag indicators to watch out for whether it's an employee it's a client maybe that has access to your property or supply house personnel people living behind their means and the financial difficulties and financial difficulties those are the two biggest ones um if you notice the third one on this list that's I know it's a tad hard to read but the third one down unusually close association with the vendor a customer we'll talk about that a little bit inventory controls um you know of somebody working in technician working with a guy behind the counter at the supply house maybe and they are in cahoots to maybe set up their own little side business or take materials either from the supply house armed and or from the contractor you know using the supply house personnel to assist them do that and there's a whole there's a whole list of these I'm not going to go through these detailed because it's not the primary purpose of this afternoon's program just a reminder those Wayne said at the beginning you'll have access to your slides so you'll be able to review them later in more detail at your leisure so some warning signs to look out for shortages of cash cash coming up missing this thing invoices from suppliers that don't look familiar questionable purchases missing altered forge documents company material expenses going up all of a sudden geez you know normally our materials are about 18 % of our sales now its twenty three percent what's going on falling company revenue the same thing and I'll talk a little bit more about that material percentage the example I just gave a little bit later in the program I've got a slider tool that I'll explain it more so here's the section of the assets and the fraud schemes that we're going to look at this afternoon mostly relating to inventory but it also relates to other company assets so you see inventory you could also consider capital assets your trucks your accounts receivable your cash accounts those kind of things and this slide just shows you a few different types of fraud you know look miss use this use of company property larceny is you know outright theft and then it shows a couple different ways below that on how inventory could be the schemes that could occur and internal controls that we want to implement to prevent or not prevent minimize the chance that they're going to happen I guess at the point that I should reiterate up and and it stated right here okay we cannot there's no way we can guarantee fraud will never happen okay we just can't it's one of those things where you try to get to perfection you get closer and closer and the decimal point gets smaller and smaller but it's still far away okay so we can never completely eliminate it we do our best that we can to minimize the risk and we have to balance minimizing the risk of you know theft of inventory let's say of happening versus the cost to implement that internal control so cost of prevention versus the cost of care and normally in most cases the cost of the computer which is recovering the losses is much higher than the prevention cost so better to prevent it rather than detect it and then deal with fixing it the most effective internal control that we can implement into our company not just for inventory but any internal oles is the separation of duties and the separation of duties essentially means that you require more than one person to complete a task okay so let's take well inventory control for example um at the bottom of this slide here the person responsible for ordering the inventory shouldn't be the one to receive it and check it in well why do we want to separate those two functions well if I'm ordering the material and then I'm the one that receives it checks it in I could be ordering you know personal items or you know items that aren't necessarily authorized so if I'm the one doing the ordering and receiving it then you know I've got a way to scam the system or there's something ordered on there and let's say we order 10 toilets and I check in the toilets and I put two of them in the back of my truck and you know when nobody's looking nobody's around at the end of the day or some of my stash to aside and I check them in oh yeah we got ten trucks well or ten toilets and if we're not properly tracking our inventory through our records and the computer systems that we have access to even if it was a manual record-keeping but if we're not monitoring this that's how these things get a happen so I walk away with two of the ten toilets and the company's got eight toilets but they paid for ten so we're trying to separate the different aspects of the transaction okay so accessing and asset recording a transaction and approving it those are the things we're trying to separate our segregate the problem we have with our smaller companies especially with the family business is where you know maybe it's just you and your husband or you and your wife and two or three plumbers or even four or five or six plumbers there's not enough employees to separate separate all those duties and so that causes a problem so how do you you know so you go ahead okay well we're going to add another person in the office to cover and protect our cash accounts receivable and our accounts payable well so now the sudden you're adding depending on what else you're going to have this individual do you could be adding 25 35 45 50 55 thousand dollars plus benefits onto your company payroll and in this case your overhead well a lot of companies are not in a position to take that on so you have to look at the increased protection from fraud occurring theft of the materials or cash or accounts payable what have you or physically any physical assets a company has versus the increased cost to add that second person in the office so you have to balance those out and sometimes you cost two or sometimes a benefit of reducing that risk of inventory being stolen is less than the increase in cost to the company by adding say a warehouse person or something so you're always have to look at that as to you know you're always going to ask cost-benefit analysis essentially inventory shrinkage um this is a term that's important to understand importation shrink its well what does that mean well it means that the inventory that we actually have is does not equal what our accounting records show whether it's in our computer system nor we just keep manual records we do a manual account well you know ok so our software says we should have 10 50 gallon water heaters in stock and I go out in the shop and I only see seven out there three and three are not they're not on the trucks are unaccounted for well that's poof up you know poof of smoke down on slide what happened to it it's gone it's shrinkage um in our industry you know it's not unusual to have some inventory shrinkage but if we're talking percentage-wise it really should be less than one-tenth of a percent you know it's a really small percentage and a small dollar amount even for a larger company if that number starts to get larger or that percentage is larger than that you're very well may have um some kind of funny business going on there you might be somebody stealing from so I took this picture this is a picture uh out in our shop on the floor a couple fittings and toilet supply 12 inch 12 supply pretty innocuous it doesn't look like a big deal um if I asked those of you in the tenants that are owners of the company I think I know the response I'd get to that when I say when you see that what does that tell you vs um maybe employee in the office or a technician that might see that on the floor out the shop and just notice it just keep walking they don't think like owners too well how long that's actually about five dollars are cost worth of material laying on the floor how long would that lay on the floor if that was a five-dollar bill not very long right compared to material and the point I make there is it's not just you know material being stolen it's um you know they don't necessarily perceive the cost of the value of it uh that oh it's just uh this is just a little bit of material it's not a big deal i just took you know geez I just took a couple fittings or whatever well you know that's a couple fittings well what if it's a garbage disposal now that's a bigger dollar bill etc etc so i want to make the connection of the actual dollars you know the proper fitting compared to the actual about that is you know whether it's a three quarter inch 90 sitting on the floor or money I mean it's essentially the same same thing you can't go nation you just can't make your payroll with a three-quarter inch 90 you need the actual cash so let's look at some specific things from the inventory standpoint that you can do um to reduce the risk of inventory shrinkage and theft what have you the number one inventory control that you can do is lock it up and it sounds really easy but for a lot of our companies that's not as quite as easy as it sounds but if you restrict access to the inventory that is going to reduce the chances that you're going to be subject to fraud you know subject to people stealing from you the problem again for the smaller companies is okay well so I can't afford to have a warehouse person so I you know I we're not big enough to be able to have a warehouse person on our overhead so what do you do well you can still have if you have an inventory uh area in your shop you could still lock it up and restrict access to it you know maybe a manager or something like that you can also install security cameras so maybe you don't lock it up but you have security cameras on your inventory area so and you let people know they're being watched just that alone setting up say a security camera laying people know that you're going to be watching them holding them accountable that in itself alone is a deterrent to theft it doesn't mean that it won't happen but it helps deter it so if you can lock up your inventory you definitely should do that um but if you can't you at least need to restrict access another way that you can protect your inventory actually is to reduce the amount of inventory you need to carry you know if you have less on stock less available and I'm not saying you short yourself from the standpoint of where you can't you know so now your trucks don't have the proper inventory and those kind of things but if you're only say--let's you're only selling five garbage disposals a month there's not really a need to have 20 in stock even if you were to get really good pricing on that arm that gets back to the screenshot of the few fittings versus the five-dollar bill you know you've got to remember everything you know when you're looking at your inventory that's that's a bunch of dollars there and we don't want to have more money tied up in inventory than we absolutely need to it because that money the actual cash itself is better invested in other aspects of our business arm we don't want to tie it up like I said earlier you know you can't make your payroll by handing out three quarter inch 90s or whatever so the less money we have tied up in inventory the better off we'll be by the same token that's why it's important to keep keep an eye on it and monitor it and lock it up if you can if it's not practical to lock it up restrict access as best you can security systems installing cameras our pricing has come way down on those so they're not nearly as expensive as they were say five ten years ago so lock it up is the first one the second the next thing that you can do with your inventory to reduce the chances of being a victim you know of fraud or having it stolen organize it um this is a pretty iconic truck and picture and George Brazil was a long time member of the PHCC he was one of the first to come up with a truck inventory system and this was a picture that he always shared with everybody and it's a perfect layout of what is on that truck now that could be a truck that could be your shop inventory but right there it's got exactly what the trucks going to have so it's going to have to water heaters to toilets you no 10 three-quarter inch copper 90s what have you but there's a specific number and there's a specific layout for everything it's a lot easier to see what you have and don't have if you've got it organized and labeled and set up in bins etc so having a standardized truck inventory having a standardized shop inventory a layout of shelving with bins and quantities you know minimum and maximum numbers of each part setting those numbers and having those numbers that's another way to reduce the chances that you will be you know that your material come up missing so if you have a truck set up and you're doing regular you know it even if you have your computer system setup where your technicians are mobile and they're using iPads or some other device and barcode scanners you still every once in a while do a physical inventory so if you go out and the truck is supposed to have ten three-quarter-inch 90s on it and you've got 15 on there you got a problem or they're supposed to be ten and there's only eight well you got a problem that way too but if it's not organized and you don't have a inventory system per se in place you you won't know what you have and don't have now getting a little further into this while how do we control okay how do we control our inventory levels are ordering levels those kind of things all about having processes and procedures in place if you are not if you don't have a system of purchase orders in your company even if you're a smaller one two three truck shop I highly encourage you to do it it's not really difficult even if you do it you know simply as a manual hello Manila sheet of paper and you list numbers down in you have a sequential order of numbers and you require all orders with any of your suppliers who have a purchase order number if it doesn't have a purchase order number you just let the suppliers know this is our company policy if there's no purchase order number assigned then we are going to refuse we're going to refuse to pay it and you can get as high tech then again with the mobile systems where you could have purchase order done electronically but you need authorization so okay so who is ordering the materials that need to be ordered make sure that they have the authorization to and then what are the ordering and what quantities and at what price so once you get the authorization then you go on to four count it so I order five water heaters three toilets into garbage disposals then when that order is delivered to the shop somebody preferably somebody besides me again separation of duties checks to make sure that what we receive our five water years three toilets and two garbage disposals and that all the items we receive are not damaged you know that they're in that their boxes and everything are in good shape and then we also compare the receiving ticket and make sure that we got the if the items at the price that we were quoted so the purchase order and the receiving a slip match then inspect it like I said inspect to make sure there's no damage and make sure that you know what you ordered five water heaters that you got five water heaters then you ought to follow up on that then the next thing you're going to do is you're going to compare the purchase order and the receiving a schlep packing slip that they send with the suppliers in voice that comes so in a p.o system you're going to say okay p 0 1 0 0 5 from ABC supply was for the Smith Bing excuse me at a smith job and you have a list of orders from the smith job or those dumb that you ordered for the Smith job then you compare that to the invoice that you got from ABC supplies for those materials and you got to make sure that the prices match up and then you can compare that also to your service invoice now with our my family business right now we are not we have not gotten to the point where we're mobile yet so we still use manual service and voices on that but our final step is comparing and matching up our service invoice for the say the Smith job with the suppliers invoice for the materials we purchased on there and we compare what we ordered versus what we installed to make sure that you know there's no discrepancy or maybe we ordered um say 60 feet of three quarter inch copper pipe but we only used 40 feet of it on the Smith job so then I know by comparing the invoice the client invoice against the supplier invoice that I have 20 feet left which is going into maybe stays on the truck and goes into truck stock but I'm comparing initially the purchase order with the packing slip for what was received comparing that to the suppliers invoice comparing it to the purchase order to make sure the pricing the same and then comparing that to the job ticket the client service invoice assuming that that order was for a specific job if it's just a stock then you just compare the suppliers invoice and the pricing on that to the receiving slip and the purchase order again we're making sure that there's no errors and the error could come from the vendor and in the attempted fraud or something even could come from the supplier side so it doesn't necessarily have to be an employee initiated thing you know you could have a situation where you know you're quoted or price on the p.o for state water heaters whatever it is right then you get the suppliers the invoice from the supplier for the water heaters and they're fifty dollars higher each well that could be somebody from the vendor side that is playing games so my point there is it's not just an employee situation the fraud to be initiated another way and frankly it could also be an honest mistake that's why you double-checked that's why it's important to check because it could be an honest error could be a typo or it could be something funny but if you don't make the comparisons of the po2 the receiving order or the packing slip to the suppliers invoice then on to those service invoice for the client for appropriate if you don't make that comparison then you don't know now one a something that has become more popular i would say especially I've seen in the last two or three years and I know a lot of ptc members I have gone this route a lot of QSC members and other industry groups companies um especially the smaller companies like the family businesses that don't necessarily have the staff so to speak you know I talked about earlier about well we can't afford a warehouse person per se a lot of vendors suppliers have what they call these VMI programs where essentially the supply house is um kind of your warehouse person and I know that in the PHCC we have national companies like Barnett and Ferguson among others that have these programs but I'm also aware and if you're not sure in your local area you can ask splices that you deal with um they may have a program that you might not even be aware of where they they would be agreeable they would say hey sure Mike I will come in you know and i'll help you set up your truck inventory and then we'll manage that you know will help you manage that for you now that's a great program and i know a lot of contractors that are taking advantage of that but the one thing i have to remind you is just because you delegate the responsibility doesn't mean you delegate the authority so my point saying that is it still your responsibility is the contractor or my responsibility is a contractor to oversee the supplier or the vendor and make sure that the program is being run or managed correctly because you could say okay I'm going to bring in a VMI system and let them go with it well if you don't see on top of it it's just like you haven't locked up your inventory I mean you could have somebody coming in and taking advantage of that way so while it's a great program that's available out there you know and you're delegating the responsibility it doesn't mean that you're delegating that you know you can't just you've got to still monitor it or oversee it i guess is the point that I'm trying to share with you there just kind of a little bit of a review here of the process with the materials this is a slide from that I've used before from the fraud programs but you know it's partly of authorization and approval okay the way that we reduce the chances of having materials or equipment what have you stolen as a physical control over the assets restrict the physical control of those assets so lock up your inventory secure equipment have lockout/tagout procedures find out procedures um you know you lock up your inventory or you have an inventory cage whatever you can have the same thing for your equipment so say you've got you know you don't carry sewer Jets on every truck or video cameras like that you can have sign up procedures for those and you can have those locked up in a secure area as well electronically secure access a note that just like the security a mentor you want to secure access to your bank records those of you that are doing online banking and things like that you know it's important to protect your computer passwords off you have company key cards that let's say you're a little bit larger company or high tech and you have one of those company ID badges that swipes they give you access to a certain area of the building or inventory room make sure that you're monitoring those in restricting accesses to you know who has those key cards and that you're updating them on a regular basis again restricting areas to authorized personnel only and then monitoring it reviewing the records make sure that the sewer jet was properly signed out um you know just an added safety thing to something like that but i'm thinking i know is popular vehicles gps systems you know tracking systems that way you know if something does happen you at least you know have a way of quickly finding out where it is even if it has been taken or stolen you may be able to track it down and recover it so that's what i have on inventory and um i'm gonna just take a quick second here i don't see any questions yet regarding that um but if you have inventory question go ahead and type it in the chat box on the right hand side i want to take a few minutes now and just again remind you you don't necessarily need to take notes so you know everything that you see and some of these slides have some detailed steps don't worry about it you're going to have access you're going to get copies of these slides so you know you'll be able to review them and read them later on um but here's some other internal control suggestions for you in other aspects of the business besides the inventory because obviously inventory is not the only asset or aspect of our business we have counts as evil is another huge area so that's not just conceivable but that's cash flow cash coming in cash test receivables petty cash all those kind of things so accounts receivable if possible to people should open the mail how realistic is this in a smaller company I know it's harder it's more challenging well why do t people open the mail so you don't have somebody just pocketing a check or maybe for very few people anymore send check or cash or cashier's check in their mail but you have two people opening the mail because or reviewing you know one person opening the mail maybe in another person observing them because the more people you get involved in a quote scheme the more likelihood it's got of being discovered so it might not be possible in a smaller company for two people to open the mail if that's not the case and you have security cameras um maybe that's something that you have security cam in the office or something where the mail is typically opened um so that's something to consider you can also and actually this is something in just talking that it popped into my head is kind of a side note that's not on this slide anybody in your company that handles money from the person in the office to the service techs out in the field should all be bonded financially bonded and what that means is that they're protected that you know you have quote insurance on them for theft up to a certain amount of money federated insurance as a partner the PHCC and that's who we have for our insurance they have a program where they find your staff up to a certain dollar amount which i think is like fifty thousand dollars if you've got somebody that's handling a lot of money you may want to get a separate policy and have a higher dollar amount but anybody that's touching money for the company either coming in or going out should be bonded that's an important thing um back to this list login document all monies received so two people their arm opening the mail or maybe it's just one person because you don't have a second person so first thing you have them do is open the mail and they list out all the checks all the payments that are received so all the monies that are received checks and as they're opening them they're also immediately stamping the checks with the restricted door endorsement stamp for the company so no funny business can go on you know they can't alter for its the check because no you put it for deposit only to ABC plumbing company and then right underneath it is the plumbing company account bank account number that it's going to get deposited to separation duties again is a big thing if you have the capability one whoever puts the deposit opens the payments up should not be the same person that does the bank deposit so person that records the list of payments that comes in and then a second person does the bank deposit and verifies the totals of the money that's been received keep the cash anything that comes in cash wise checks locked in a secure area a lock box or drawer or something until you deposit it into the bank I don't recommend that you keep cash especially or checks for the company um in the office sitting around for very long the longer it sits around the more likely but it's got a chance of being stolen or something happening to it so um if you're a smaller company and maybe you don't make deposits every day maybe it's every other day if you're a really large company with a you know I can't see a scenario necessarily where you've got nailed delivery more than once a day but if you were in that situation you might make multiple trips on a daily basis maybe T chirps a day for the bank arm but i would say in most cases you know daily trips to the bank unless it doesn't warrant it um blank check stock while I'm thinking about it so on the cash disbursements I'd make sure that company checks a lot of us if you're not doing electronic payments you know you've got company check stock you put in a laser printer to have it print out the check make sure that that's secured in a locked area with restricted access again that's another way that you could get money taken from you um but on the deposits again make sure you get them in at least my recommendation is every day unless it's a really small amount and maybe you wait till the next day um batch out the credit cards reconciled credit card payments daily I this the person that's doing the data entry may be under credit card payments as you're processing invoices that person also should not be the one reconciling the credit card payments at the end of the day if possible that should be two separate individuals um invoices make sure that you have them pre numbered and that they're accounted for so a batch of invoices doesn't go disappearing I've there's been contractors that have had that happen where they've had employees technicians use company invoices but they've used them on side jobs and just collected cash and with homeowners gotten a receipt and they think they're they've had just had service from ABC plumbing when it's gone into you know Mike Bohan says pocket is the plumbing technician so invoices should all be pre numbered and locked up kind of like your check stock any adjustments any refunds credit anything like that should require management approval and sign off on that way that eliminates the funny business of oh yeah no I gave mrs. Smith a fifty-dollar refund when that fifty dollars really went into the person's pocket so um you should have a system where you know any credits adjustments like that have to require management or owners sign off on and if it's a smaller company and you don't have managed you know a managerial level then you know require that the owner that you sign off on it for any kind of refund or adjustment all right on the payable side I talked a little bit about it with inventory require purchase order number job name for all purchases it's not really if you don't have a purchase order system it's not difficult to implement if nothing else you're going to go to ABC supply and get materials for mrs. Smith's job when you or your technician goes to supply house you just tell the supply house person when ask for a PL numbered stone to put if you don't have a p.o number system just tell the Smith job that way you know them when that invoice comes into the office you'll be able that's for the Smith job and you'll be able to attach that to the service invoice and do the comparison so even if you don't have one it's not a real difficult thing to set up all checks required to submit yours on all payments if you want to say okay any check over five hundred dollars requires a second second signature that's fine I've seen companies that do that any check over a thousand dollars or five thousand dollars for the real large companies have two lines and require two different people to sign off on the check now this some sounds somewhat contradictory to what I'm going to tell you here but I would also restrict the number of people who can sign checks for the company restrict the number of signers because um especially in the smaller family businesses maybe you know you've got three or four family members if you want to have a you know two or three of them have signing authorization that's fine but you know you don't necessarily want to have 10 people be able to sign checks even if you're a company with 50 employees there's not excuse me there's not a need to have that many people authorized to sign checks and again the more that you have to authorize the more chances that you have for fraud or theft something to happen and your credit cards set your limits set purchase limits um you know so um you know and you're able to do this with the credit card company tell them you know like you know nope no single purchase over this dollar amount whatever um fuel company those you could that have company fuel cards restrict the type of purchases allowed with a lot of the fuel companies now you know whether it's BP or Sunoco or sell or whoever you know a lot of these places now you can't just get gas you know you can maybe get a oil change or auto repair truck services you can also buy pop and candy and that kind of stuff and if you're not careful if you if that's not coated you know you're not only paying for the fuel you could be paying for somebody's pop or you know God forbid something uh you know some alcoholic beverage or something so make sure that you restrict type of purchases allowed on your account the person that enters the accounts payable bills they should also be able to authorize or sign the checks again i know that's a little bit harder in a smaller company but that's separation of duties you know you don't want the person entering the cat you know if i call up again kind of Ferguson let's say and i order something that i shouldn't be ordering if I'm entering the payables into the computer and I'm able to sign the check off on it then you never know what happened unless your view unless you're reviewing it so if you can separate those two functions you absolutely should company checks like I mentioned before should be locked in a secure area arm and then I personally I'm not in favor of company on the petty cash account um if you've got what we've got in our family business you know most of the time it's not a large dollar amount you know maybe somebody has to run you know a hardware store or something because they don't have it on their truck um we just tell our guy when we reimburse our guys we tell them the you know pay cash get a receipt or maybe they have a credit card I'm not big on petty cash because it's difficult to reconcile and it all my experience is better and ends up missing so doesn't mean you can't do it but I personally am not in favor of petty cash accounts internal controls on payroll a few items here you know ideally you'd have a time clock or other electronic reporting method to track the employees time but if not that then obviously at least you have time sheets or time cards as you know that's mandated by law but compare the employee time cards with maybe two guys worked on the same job compare those two time cards you know if they went to the same jobs together that week make sure they match up you know unless you know for certain that there was a reason that employee a stay an hour later one day than employee be if you have GPS on your vehicle's surveillance cameras at the shop compare those actually excuse me compare those records to the recordings and or what the GPS reports say also have a supervisor reviewer sign off on the subordinates time cards so you don't have time card pad and going on there because you could have a situation where somebody in the office and one of the service techs are working in cahoots kind of like hey you know I'm going to pad my timecard by 15 minutes a day or half an hour or whatever and then maybe they share that money so make sure the manager or somebody resigns off on all the time cards or you've use them again what's not being watched or monitored or tracked you know it's a subject you know your subject to being having a problem the person employing that you have doing the payroll data entry in that the same thing they shouldn't have the ability to approve the timecards or sign the payroll checks again that's the separation of duties uh internal control the smaller companies again I know it's more challenging if you use an outside payroll company that might be one way around or that might be one way to help with that internal control is because you're using an outside payroll company so that eliminates one of the duties internally so you're separating one of the duties actually by just having an outside vendor a third-party handle that aspect of it and then restrict access to the payroll records okay you know there's only certain eyes that should be authorized on that so kind of like the check stock and that making cash make sure it's locked up if you have a system in place for it you know procedure if somebody needs a copy of some payroll records you've got a process and a procedure for getting a copy of that record a couple final points here code of conduct um you know when it comes to frog communicating the company philosophy simply the owners and managers set the tone at the top and the reason I used this slide again was because it was last year the year before we did a two-part series on fraud and one of the Pichichi members that attended that some that webinar we went over this exact point and I said if you do nothing else other than go say what's your next company meeting and say hey you know just want to let you know that we're not going to tolerate anybody stealing from us or stealing from our clients what have you one of the people attending the webinar did that the first section and they came back the second session and they typed in the chat area that they did that and the day after they did that their bookkeeper did not show up for work now the only sad thing from inquiring minds kind of thing we never did find out from that company of that member because they weren't they weren't necessarily identified um as to what ever happened wait why didn't the employee show up you know we could only kind of make the assumption while they didn't you know they just kind of never showed up this was a week later by the way so you know the day after the first webinar the owner must have done this and then that next day the person didn't show up well this was you know a handful of days later when we did the second session of the fraud so that's my point of saying you know simply even just doing that communicating that you won't tolerate it is a form of an internal control and I hope that it worked out for that PHCC members best I hope that you know they weren't subject to a huge amount of loss or something but something was definitely happening in there once you put in inventory controls in place in these other internal controls in place you have to monitor them okay make sure that they're operating properly keep you know you can't just put them in place and then forget about them you got to take a look and review them every once in a while and make sure they're working properly when I mentioned earlier about the material percent as well you know got our material percentage is only eighteen percent of our invoice all of a sudden it's twenty-three percent what's going on well by regularly reviewing your financial reports that's one of the ways you can tell you might have a problem and here's just a portion of a report that shows industry averages for inventory days Council days return on equity all that so these are industry benchmarks well if your numbers are way off of this bench you know these benchmarks or maybe way off of previous years or your budget you know let's say you budget your fuel expense at five percent and it's running at eight percent looking at these reports of reviewing these reports could tell you you might have a problem you know we'll give you a heads up at hey you know somebody could be fueling their personal vehicles or your your material cost numbers on somebody could be purchasing materials um fraud is a legal minefield okay and you know we are plumbing and heating and cooling contractors and work in the office and accountants and things like that we are not attorneys okay this is a very litigious area you need to be very careful so if you find or you suspect that you have a problem be careful on how you act just a few don't okay if you get if you find some of these stealing materials whatever okay don't immediately confront the person or restrain them okay take a deep breath try to remain calm don't immediately terminate them okay don't say to uh you know the other text I saw bill take three water heaters last night you know don't do things like that don't any documentation fine and the originals don't write on it don't interview the suspect don't interview the suspect um down the road alone do it with at least one witness if you find that you're in this situation my recommendation is that you contact your company attorney in your insurance agent in your accountant those three people those are 3 professionals that you deal with and that you pay for their services there's a reason you know a relationship with them so I'm not very off God you know I hope it doesn't happen but if it does happen contact those professionals before you make any rash decisions your attorney especially will help guide you as to what you can do legally and cannot do and what you should do so that's a lot to cover in a brief period of time and again some of them kind of fast but we have a couple minutes left I'm going to open it up for any questions I don't see any in the box right now but I'm going to give you a minute or two if you have something you want to ask me so go ahead and type it in the chat section as a reminder again Wayne is going to send you a link later to review the webinar and you will have copies of these slides as well if there aren't any questions what I'm going to do is here is I'm gonna go to this last here's my contact information at the bottom if you find later you have a question or that you would like to answer or something specific about your company situation you can contact me my phone numbers for 4 07 08 2583 it's my home office number or you can email me at em as a michael and my last name bo hence Poh I NC at keeping score CPA calm and I will be glad to answer any questions that you may have so with that I'm going to turn it back over to you Wayne and we can wrap it up you