California Regional Center Vendors: 5 Ways Employees Can Steal From Your Business

California Regional Center vendors provide critical services to individuals with developmental disabilities. But many vendors are also relatively small organizations where owners and executives place significant trust in a handful of employees.

That trust can create risk.

In 23 years as a financial statement auditor, and forensic accountant, I’ve seen just about everything. I’ve seen brothers steal from brothers, spouses lie, manipulate and steal from each other, business partners end up suing one another, and even employees who were rewarded with ownership in a company turn around and sued the owners who gave them that opportunity. The best advice I can give any business owner is simple: never trust anyone 100% when it comes to your money. Trust people, but build controls around that trust. Review the bank statements, understand where the money is going, and make sure no one person has complete control over a transaction from beginning to end. Good internal controls aren’t an accusation—they protect the business, the owner, and honest employees alike.

Here are five areas Regional Center vendor owners should pay attention to.

1. An Employee Writes Checks — and Reconciles the Bank Account

This is one of the biggest internal-control problems in a small organization.

If the same employee can create or sign checks, record transactions in the accounting system, and reconcile the bank account, that person may have the ability to both take money and conceal the transaction.

Whenever practical, these responsibilities should be separated.

At a minimum, the owner or another independent person should review the bank statement and completed bank reconciliation every month. Don't simply ask, “Did you reconcile the bank account?” Actually look at it.

2. Unauthorized Credit Card Purchases

Company credit cards are convenient, but they can easily become a source of personal spending.

Small personal purchases may gradually turn into larger ones if nobody is reviewing receipts and statements.

Owners should receive or independently access the credit card statements and periodically compare charges with receipts and supporting documentation. Pay particular attention to unusual merchants, weekend purchases, recurring charges, and expenses that don't appear related to the organization's programs.

3. Payroll Fraud

For many Regional Center vendors, payroll is one of the organization's largest expenses—which also makes it an important area for internal controls.

Potential problems can include unauthorized raises, inflated hours, improper overtime, payments to former employees, fictitious employees, or inappropriate changes to payroll information.

Management should periodically review the actual payroll register, not merely the total amount withdrawn from the bank.

Ask yourself: Do I recognize everyone being paid, and do their wages and hours make sense?

4. Fake or Improper Vendor Payments

An employee with access to accounts payable may be able to create a fictitious vendor, redirect payments, submit duplicate invoices, or arrange payments to a business in which they have an undisclosed interest.

Owners should periodically review the vendor list and investigate unfamiliar vendors.

Changes to vendor addresses or banking information deserve particular attention, especially when electronic payments are involved.

5. Manipulating Expense Classifications

For California Regional Center vendors, improper expense classification can create an additional problem because certain vendors are subject to the 85/15 expenditure requirement.

An expense being recorded in the accounting system does not necessarily mean it has been classified correctly.

Management should understand how costs are being allocated between direct-service and administrative activities and periodically review those classifications. Incorrect classifications can affect financial reporting and potentially regulatory compliance.

The Best Internal Control May Be the Owner

A small organization may not have enough employees to achieve perfect segregation of duties. That's understandable.

But that makes active owner oversight even more important.

Review your bank statements. Review reconciliations. Look at payroll. Look at credit card activity. Question unusual vendors. Ask for supporting documentation.

You don't need to perform the bookkeeping yourself. You do need to understand where the money is going.

Fraud prevention isn't about distrusting your employees. It's about establishing controls so that no single person—including a trusted employee—has unchecked control over the organization's finances.

Need Help With Your Regional Center Financial Reporting?

Streamlined Reviews provides independent CPA financial statement review services for California Regional Center vendors, including assistance with financial reporting and the 85/15 expenditure requirement.

If you have questions about your accounting records, internal controls, or upcoming financial statement review, contact Streamlined Reviews to discuss your situation.

This article provides general educational information and is not intended as legal advice or as a substitute for an evaluation of your organization's specific internal controls.