Reduce Possibility of Fraud Business fraud is a real problem. Its affects can be devastating to a small business and for this reason it’s referred to as a silent killer. Fraud can mask itself in different forms, some of which is complex to detect.
Some of the more common forms include: theft by employees of company checks or charges on company accounts, theft of inventory or office supplies, billing schemes, check tampering which can be done by paying non-existing suppliers, recording unapproved extra or overtime, claiming reimbursement for non-existing expenses, or outright theft of cash from the register, to name a few.
The Association of Certified Fraud Examiners (ACFE) has estimated that a business will lose about 7% of profit due to fraud annually. Although both large and small companies experience loss due to fraud, it’s the small companies who are most vulnerable. The reason is mainly because small companies don’t have the time or the resources to monitor for fraud activity.
As accountants and Business Advisers RR Accountants LTD entrusted with educating our clients on ways to safeguard themselves against loss of income due to fraud. Here is a list of key internal control practices we recommend for our clients:
Make a written policy outlining your internal control procedures and make them well known to management and employees. Before hiring a manager or an employee, review those procedures together and get his/her written commitment to those procedures. Oftentimes in a small business, the manager is the business owner or partner who takes hands-off approach due to his/her busy schedule. We’ll hear from our clients about the bookkeeper who is given the task of handling all the paperwork because the owner is just too busy. In addition, convey to the employees your culture of internal controls and let them know that they will be checked up on. This is important because studies show that employees who have an opportunity to commit fraud without being caught will exercise this opportunity. How often have you heard that it was the trusted employee or a family member who committed the fraud? Encourage employees to report fraud and have those sign agreement against anti-fraud behavior. As an owner, never let your employees see you break your own rules. This will set up a bad precedent which will only weaken your ability to enforce your own policies in the future. Setup a well functional accounting system through a program like QuickBooks and learn how to properly use it. I can’t stress enough how important this is. Knowing how to enter data or access reports will give you independent ability to review financial data. Additionally, you should setup user passwords which will limit employees’ access to sensitive information.
Employees can easily exploit this by hiding or changing information. When setting up an employee on QuickBooks do not give them Admin rights. This should be reserved for the owner or an external accountant. Get to know your books – Regularly run and review financial reports and watch for fluctuations that don’t have reasonable explanations. Turn on the audit trail if you are using QuickBooks software. This function keeps track of all the activity by a user. You can uncover inappropriate employee accounting manipulations just by reviewing the Audit Trail Report. Use petty cash account sparingly and reconcile often – many businesses need cash on hand for various small or unexpected purchases. Unfortunately, we often see this being one of the most exploited areas of a small business such as a restaurant or a bar. If you maintain a petty cash account, use a ledger to record receipts and reconcile the account regularly.
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QuickBooks we setup a petty cash account as a bank and record all cash purchases against that account. This makes reconciling much easier. Back up your data and keep multiple copies of the file. Also keep copies of the last 2 or 3 backups. If you give an employee a business credit or a debit card, make sure to review all their receipts. Designate cardholders per employee so no two people can disclaim charges from the same account. Reconcile bank accounts and credit cards monthly. If there is any inappropriate activity you can catch it quickly. Regularly
review payroll records for unapproved employee loans, pay raises, overtime, extra hours or payments to phantom employees.
Install a time clock system to prevent time theft which is one of the biggest forms of employee theft. Inventory theft is also a huge problem, and it costs businesses billions of dollars annually. Companies should conduct a physical count for goods available for sale as well as for damaged and obsolete inventory. Those labeled unsellable must be written off in the accounting records. A comparison between the physical count and book balances will determine missing inventory.
Practice segregation of duties – do not allow the same employee handle functions where they have control or an ability to cover up fraud. Here are some common examples:
- Allowing the employee who requests purchase of goods to also approve the purchases
- Letting the person who did the purchasing of goods reconcile monthly financial reports
- Having any employee who is authorized to make purchases issue checks
- Having the person who reconciles the check book also able to issue checks
- Letting the employee who opens mail make deposits or maintain the A/R or A/P records
Conduct Random Checks – get into the habit of checking in on employees and your financial data without any advance notice. Employees, who commit fraud, rely on predictable patterns of behavior or workflow and then exploit it. Review your financial statements with an outside accountant who will have an unbiased opinion about your financial activity.
