Episode 30

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Drew McLellan is the Top Dog at Agency Management Institute. He has also owned and operated his own agency over the last 20-years. And all through the year, he straddles the fence of working in his agency and working with 250+ small- to mid-size agencies in a variety of ways.

AMI works with agency owners by:

  • Leading agency owner peer groups
  • Offering workshops for owners and their leadership teams
  • Offering AE bootcamps
  • Conducting individual agency owner coaching
  • Doing on-site consulting
  • Offering online courses in agency new business and account service

Because he works with a lot of agencies every year — he has the unique opportunity to see the patterns and the habits (both good and bad) that happen over and over again. He has also written two books and been featured in The New York Times, Entrepreneur Magazine, and Fortune Small Business. The Wall Street Journal called his blog “One of 10 blogs every entrepreneur should read.”


What you’ll learn about in this episode:

  • Common ways internal fraud is committed and ways to prevent it from happening
  • How agencies are targeted with email scams
  • The ways Drew has seen agency employees embezzle hundreds of thousands of dollars from agencies
  • The systems you need to put in place to prevent fraud


The Golden Nugget:

“The biggest threat to your agency’s financial health is internal fraud.” – @DrewMcLellan Click To Tweet

Click to tweet: Drew McLellan shares the inside knowledge needed to run an agency on Build a Better Agency!


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Speaker 1: If you’re going to take the risk of running an agency, shouldn’t you get the benefits too? Welcome to Build A Better Agency, where we show you how to build an agency that can scale and grow with better clients, invest in employees and best of all, more money to the bottom line. Bringing his 25 plus years of expertise as both an agency, owner and agency consultant to you, please welcome your host, Drew McLellan.


Drew McLellan: Hey, everybody. Drew McLellan here with another episode of Build A Better Agency. So today’s episode is a solo cast. So if you remember, most of my episodes involve me having a guest on with me, and we talk about some aspect of running an agency, but every fifth episode is a solo cast. That’s just where you and I hang out for a little bit together, and I talk to you about something that I really think needs to be on your radar screen.


  And today’s topic is one that nobody’s going to be excited to talk about, but it’s absolutely vital to your business. Remember when you were a kid and you had a sleep over, or you were out camping, and soon as it got dark, you wanted to gather around the campfire or you wanted to sit around the fireplace or wherever you were gathered, and everybody tried to tell the scariest story that they could come up with? And their whole goal was just to scare the bejesus out of everybody else at the party or who was camping, to the point that nobody wanted to go to bed.


  Well, today’s solo cast is the adult agency owner version of those scary stories. Today, I want to talk to you about a problem, a real danger for agencies, and that danger is internal fraud. Unfortunately, I have seen more than one case of it through the lens of AMI as I work with agency owners. And I want to talk to you about some of the most common ways that that fraud is committed, and I want to talk to you about ways that you can prevent it from happening to you.


  What put this on my radar screen to talk to you about right now is that for the last year, year and a half or so, a big email scam has been going around, and for some reason, agencies seem to be one of the targeted businesses. So the way the scam works is that whoever in your shop does your book, so accounting person, the CFO, whatever you call them bookkeeper, they get an email from you, the agency owner. And in essence, it says… Let’s say your accounting person’s name is Bob. “Hey Bob, can you please wire 50,000, 100,000, 20,000, whatever it is, dollars to this bank account.” It gives all the wire information. “It would be great if you could get that done today. Thanks, Drew.”


  And these scammers have really brilliantly figured out how to mask an email so it absolutely looks like it’s coming from your domain and from your personal email. Yes, sometimes they slip up a little bit. Sometimes the tone of the email is not quite right. We got one at my agency and my accounting person recognized right away because of the tone that I didn’t send it, but she wasn’t flagged by the way the email looked. It was really just the tone.


  But I’ve had two AMI agencies that were not so fortunate. Their accounting person received the email and immediately acted upon, it thinking that it was from the agency owner. And in one case, over $50,000 got immediately wired out, and in another case about $30,000 got wired out. One of the agency owners was fortunate enough that they were able to get some of the money back, but the other one was completely out of luck. The minute that that money hit the bank account where it had been wired, it was immediately transferred to another bank account out of the country and that was that. So that’s a case of bad practice and someone not following probably process and procedures. It wasn’t intentional on the accounting person’s part, but the agency is still out $30,000 or $50,000, and for many agencies that is pretty tough to recover from.


  In most cases, the fraud and the danger to you is not some guy out there in a foreign land sending emails, but it’s actually much closer to home. It really is, in most cases, someone who works for you, someone that you trust, someone that you have given a great deal of both responsibility and authority to, and they are abusing that. So let me tell you some of the ways I have seen internal fraud be committed.


  So the easiest way is an employee opens up a credit card in the company name that you, the owner, don’t know anything about, and just charges things personally, and then uses funds from either client payments or money that was put aside for media to pay down that credit card every month enough that its flies under the radar screen. And typically the way that’s caught is when the agency owner gets a credit report or goes to buy a car or something happens where all of a sudden they’re alerted that there is a credit card in their name that they didn’t know about. But all too often, by then, hundreds of thousands of dollars have been run through that card, and that employee is nowhere to be found.


  Another way that’s pretty common is there was an AMI agency where the accounting person created a bunch of phony vendors that didn’t really exist and then was writing checks to those phony vendors, which were actually DBAs of a company that he owned, and then depositing the money into his own check-in account. And that was really a case of the agency owner taking his eye off the ball. He really trusted this guy and just really wasn’t paying a lot of attention, and $400,000 later… Let me repeat that for you. $400,000 later, he caught the problem when media vendors started calling and saying they weren’t getting paid, because that was how the accounting person was funneling the money out, was he was shorting vendors and putting in the books that they had been paid even though they had not been paid. And that guy, again walked away with $400,000.


  And because the accounting practices in that agency were a little sloppy, the police really couldn’t do anything because there wasn’t a clear paper trail to be able to prove that this guy had done what he had done. And interestingly, the way that that agency owner got some restitution, and, by the way, the way that that accounting person ended up in jail was not through the police department, but actually through the IRS. The agency owner turned the guy into the IRS and they went after it in a much more diligent way than the local police did. But again, that agency owner got pennies on the dollar back, had to make good all of those media bills that hadn’t gotten paid, and several years later he’s still digging out of that hole, all because he didn’t have good best practices in place for his accounting.


  And then another story is an agency owner who had, again, an accounting person that they absolutely trusted, and this person, as often happens, had access to a lot of the owner’s personal information like their social security number because there were tax files and other things in the office. Anyway, what this person did was they opened up a bunch of credit in the owner’s name, bunch of credit cards in the owner’s name, and just charged an ungodly amount of money on those credit cards, and then again was using company funds to pay for those credit cards to pay the minimum payments.


  And when that accounting person got the feeling that the owners were starting to catch on… What happened is the owner was financing something and pulled a credit report, and all of a sudden we’re seeing credit cards that she had no idea that she had. So not only did she and her agency have to deal with the huge hole of debt that this accounting person had dug for them by charging a bunch of stuff and then using money that should have been used to pay vendors to pay off the credit cards, not only did she have that to deal with, but she had the whole identity-theft issue and the bad credit, and it was really, really a disaster. And again, in this case, they were able to prosecute and the person did a little bit of jail time and someday might do restitution, but again, restitution just means they owe you the money and they’re supposed to pay you. That’s different than you having money in your bank account.


  So this is a really big risk to you. And I totally get right now in your head, you’re saying, “That is awful that that happened to those people, but you know what? Thank God I have…” And then fill in the blank of the name of whoever does your books. And you know what? I get that, because the person who does the books for me at my agency has been with me for over 15 years and I trust her completely. I would give her keys to my house. I would let her hang out with my daughter forever. I would hand her my wallet full of money and fully expect it to be handed back to me with just as much money. I totally trust her.


  But you know what? Here’s one of the reasons why I know I can trust her, is because early on, she was the one who insisted that we put some practices in place so that I and the agency were absolutely protected. And, as she pointed out to me, that meant she was protected as well. She would never be accused of something that I could or couldn’t prove that she did, because we have a system in place that doesn’t allow for fraud.


  And really none of the stuff I’m going to talk to you about is super complicated, and none of it is super expensive. It’s just a best practice. And it may take a little bit of time, it may be a little inconvenient, but compared to digging out of a $400,000 hole or having your identity stolen and having to repair that over years and years and years, this stuff is a piece of cake.


  So here’s some things that I think you should be doing to make sure that your accounting department is clean and that you are not at risk for internal fraud. And by the way, sometimes internal fraud happens in other departments of your company, but the reality is the people who control and touch and move your money around are the ones who are most likely to do something with that money, and they certainly have the access that no one else has. So let’s focus today on really how you can put checks and balances in place inside your agency.


  The first one is, before you hire anyone to work in your accounting department, you need to run a thorough criminal background check and a thorough credit check. That is just best practice 101. If anything on either of those reports gives you hesitation, if anything on either of those reports makes you go, “I wonder what that’s about,” should you ask the question? Absolutely. But should that be a huge red flag for you, and should you think very, very carefully about bringing that person into your shop? Absolutely.


  If you’ve already got people in your accounting department, obviously you can’t really do a background check. And part of the background check, by the way, for accounting people is you should talk to whoever they are leaving to come to your place, even if they ask you not to. And you can do it. Put them on probation for 90 days. Don’t let them near your bank accounts. And do it after you hire the person, if you want to, but you absolutely need to know that they are leaving for the reasons that they stated and that they are not trying to escape something like fraud or bad money management practices, all those things.


  In terms of the credit check, even if you’ve got folks in your department now, I would suggest that you implement an annual credit check for anyone in your accounting department. So it’s just a policy change. You would just put it in your employee manual, and just say, “As of January 1st, 2017…” You’d want to give them plenty of notice, but, “As of January 1st, 2017, we will be running a credit check on anyone who has anything to do with agency money.”


  And what you’re looking for there is not that they have no debt or that they have a hundred credit score. It’s not about that. It’s about the fact that if they’re going to manage your money, don’t you want them to be able to manage their own money pretty well? So of course, they’re probably going to have some credit card debt, or they’re going to have a mortgage or a car loan, whatever. That’s fine, but you also want to look and make sure that they’re making all their payments promptly and that they do have at least a decent credit score. Because good people, when their backs are against a wall, can sometimes make really bad choices, and you don’t want to open the door to that. So I would highly suggest the annual credit check for anyone who touches any aspect of your money.


  And then if you can, really the cash management duties, the AP, accounts payable and accounts receivable, should be divided. The same person shouldn’t do both. It’s a lot harder to hide fraud if you only handle half of the equations. So if you can, divide those up. It doesn’t necessarily mean that you have two people who are skilled in accounting. It may be that you have somebody who’s plugging invoices into an accounting system, and that could be a more of an admin function. Or you have somebody who is writing checks to vendors, and again, that could be more of an admin function. But if you can, and this is tough in a small shop, if you can, divide up those duties.


  One thing you absolutely should do is that all statements for your checking accounts and your credit cards should be sent to you, the agency owner, at home. You should open them every month. You should just quickly glance through them. And what you’re looking for is something that looks out of place. So flip through the canceled checks, if you still get those, and look at the monthly statements and look at the charges on your credit card, and then bring the statements back to the office and give them to your accountant and then he or she can put them into your accounting software.


  If you’re not going to look at them, you still want to have them sent to your house. The act of having them sent to your house, and the person inside your shop knowing that you are going to have access to them every month, and in their mind, you’re going to look at them every month, probably eliminates 80% or 85% of all fraud just by doing that. So even if you’re not going to look at them, have them mailed to your house. Don’t bring them in unopened, obviously. Make sure that you open them and rifle through them enough that it looks like you’re looking at them. And clearly what I’m telling you is actually look at them, but if you’re not going to do that, you still should have them mailed to you.


  Another best practice in terms of your accounting is that any check over X amount… Depending on the size of your agency, that amount is going to vary, but set an amount that the threshold that is pretty low, that it’s going to be a fair amount of checks, require two signatures. Now, here’s the deal. You don’t have to be the second signatory. It could be someone else in the agency, if you travel a lot or you’re not around or you just don’t want to do it. The whole point is that, again, that accounting person knows that someone else is looking over their shoulder at what they’re doing and is participating in the accounting activities.


  So in most cases, it is the agency owner. But if for some reason you don’t want it to be you, then make it your creative director or make it somebody else who’s on a leadership team with you. But make sure that you at least have the double signatures and that that is never violated. In fact, you need to call the bank and say, “If you ever cash a check over, again, X amount that only has one signature, I am not going to be responsible for it. You guys need to watch for this.” And they will watch for it. They absolutely will.


  Another easy thing to do is to make sure that your mail is opened by someone other than your accounting person. So in most cases, it’s somebody who’s sitting at the front desk or an intern, or a junior woodchuck account person, whoever it is, but assign the task of picking up the mail every day and opening it to someone other than someone in the accounting department.


  And then any time they open up an envelope and there’s a check inside, they should immediately stamp it for deposit. So you should have one of those $10 deposit-only stamps that has your account number on it and the name of your bank, and you can get those anywhere. But you should have one of those, and as soon as they open it, they are stamping the back of those checks with that deposit-only stamp. And again, just that little change, that little behavior, will reduce the risk of fraud significantly inside your shop.


  And the last thing you should do, the last but certainly not least, is you should require, and I mean this, you should require that whoever is doing your books, and again, I’m talking about people inside your agency, not if you hire an accounting firm, but whoever’s doing your books inside your agency, they must take a week of vacation every year where they are away from their desk for five days, and you are going to hire a temp.


  And in many cases, people will get someone from the accounting firm that does their taxes, or you can hire a temp with accounting background. In most cases, agency accounting is not super complicated. If you use a certain kind of software, say, Workamajig or Advantage, you can find somebody who has skill in that and hire them for a week or two, and have them come in and perform your accounting person’s job responsibilities for at least five days. I promise you if they are doing something weird, it will pop up in five days. And again, if they know that this is part of your policy, because the whole point of this is to prevent it, not catch it after it happens, if they know that this is your policy, it is going to discourage this sort of behavior in a big, bad way.


  So again, I know this is not a sexy topic, this isn’t a fun topic, but this is a bread-and-butter critical topic. I want to make sure that you are taking home the money that you have earned. I want to make sure that you have money at the end of the month to pay your people. I want to make sure that you have money to invest in your business. And it’s hard enough to do that in an agency with no one stealing from you, but it’s darn near impossible when somebody has their hand in your pocket. And it’s heartbreaking when the person who has their hand in your pocket is one of your employees. It is absolutely heartbreaking. I will tell you, in every case, the agency owner was sick to their stomach about the money, but they were heartbroken because of who had taken the money. So protect yourself, protect your agency, protect your family, and put these best practices into play.


  That’s it for today. Thank you so much for spending time with me. If you have questions about what we talked about today or anything, you know how to reach me. I’m [email protected] and I hope that you will come back next week for another episode. I promise I will have a guest with me next time who will talk about some aspect of the business that will help you build a bigger, better, stronger agency.


  And I would love it if you would scoot over to iTunes or Stitcher and leave us a rating. That’s really how we’re going to get found by other agency owners. One of my goals in doing this podcast is just to make it a resource for agency owners of all sizes, but particularly small to mid-sized agencies, and the way they find us is the more ratings and reviews that we get, the more iTunes in particular promotes us on their pages. So if you would go ahead and do that, I would be most grateful. And don’t forget to subscribe so that you do not miss an episode. If you’re wondering what else is going on at Agency Management Institute in terms of our workshops or our owner networks, head over to agencymanagementinstitute.com and check it out there. And again, I’m around if you have questions. Thanks, and I’ll see you next week.


Speaker 1: That’s all for this episode of Build A Better Agency. Be sure to visit agencymanagementinstitute.com to learn more about our workshops and other ways we serve small to mid-sized agencies. While you’re there, sign up for our e-newsletter, grab our free e-book and check out the blog. Growing a bigger, better agency that makes more money, attracts bigger clients, and doesn’t consume your life is possible here on Build A Better Agency.