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7 Ways To Control Fraud in Your Small Business

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Few people wake up in the morning and say “I’m going to rob my employer.”

Over the past few years, the media attention has been captured by cases of corporate fraud involving very large or publicly traded businesses. What about the fraud that we never hear about?  According to the American Institute of Certified Public Accountants (AICPA), small and midsize companies suffer a greater share of fraud losses than do the largest companies. Business owners shouldn’t give up on being trusting of your employees, but, it is always wise to know what’s going on in your company and back that trust up with verification. A hostile or non-supportive work environment causes employees to more easily justify fraudulent behavior.  As the business owner you must be the ethical example, setting the tone and culture that empowers your employees

Auditing is one of the primary accounting policies used against embezzlement. Auditing should be done by a separate accountant to assure the reliability and faithful representation of the financial data. More so, regular audits specifically monthly audits should be done. Furthermore, surprise audits must also be implemented.

Here a 7 more ways that can help keep fraud out of your business.

#1. Ask behavior-specific interview questions The first place to stop fraud is at the door  during your interview process. “Every business that has employees is prone to fraud, but there is no specific stereotype. Try to learn more about a person’s behavior and ethics during the interview. Ask them detailed questions about their resume or what you might find if you requested an investigation from a previous employer.  If the person has something to hide, they won’t come back.”

#2. Check employee references. When hiring new employees, check references and perform background checks that include employment, credit, licensing and criminal history. The cost is far outweighed by the benefit.

#3. Control who reviews sensitive documents.  Business owners should control who receives bank statements and other sensitive documents. It is not farfetched for a small-business owner to have a separate post office box for the purpose of receiving bank statements, customer receipts or other sensitive documents.

#4. Consider independent review. All account reconciliations and general ledger balances should have an independent review by a person who is not a part of the day-to-day transactions.  There should be regular spot checks and reviews, providing a deterrent for fraudulent activity.

#5. Checks should require more than one signature.  Require two signatures when issuing company checks. It is also imperative that checks should not be signed by the same employee who prepares the company’s expenses vouchers.

#6. Documentation of receipts, vouchers, checks, etc. These source documents are used in preparing financial statements. These documents can also be used to detect embezzlement in the workplace. By implementing a strict policy of documentation, business owners can easily identify embezzlement or fraud.

#7. Control Petty cash and bank reconciliations. Your amount of petty cash should be maintained at a minimum and must integrate a voucher system as well. Receipts and other source documents concerning petty cash transactions should always be kept for documentation purposes.

Some Red Flags of Possible Fraud

  • Not allowing someone else to access their work area
  • Prefers to be unsupervised by working after hours or taking work home
  • Financial records missing or altered
  • Lack of organization in the work area
  • Unexplained or sudden change in behavior
  • Sudden poor morale or lack of teamwork
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Written by Beverly S. Davis

March 27, 2012 at 1:53 am

Posted in Entrepreneurship

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