Fraud Prevention
Fraud Prevention
A real life example. Tom had accomplished his goal: his business ran effectively without his daily involvement, including not signing checks. He had a signature stamp and only two people had access to it: the bookkeeper and his personal assistant. He thought there was sufficient oversight from each employee to eliminate problems. His assistant often ran company errands and used his company American Express Card. However, unbeknownst to Tom, his assistant was having financial problems at home. She started charging personal items or expenses to it at the same time as buying company items. Tom did not review the statements in detail, especially the individual receipts. Once this assistant realized that the statement was not being watched closely, she got more aggressive: groceries, television, and car expenses. She covered her tracks by intercepting the Amex statement the day it came it and paying for it by check using the signature stamp. The bookkeeper assumed it was fine as Amex was a valid vendor and they used it a lot. Tom finally realized that he had not seen a statement nor a check related to Amex in quite a few months and found a significant level of embezzled funds.
It is not as easy for small companies to prevent the temptation of fraud with separation of duties due to staff size. But there are many things you can do to help reduce the potential for fraud. Some of these are:
• Always sign checks. If your name is forged on a check that is the bank’s problem not yours. If at all possible have whatever backup is available (invoices, receiving document, and purchase requisitions) attached. It is also good if another person mails the checks.
• Have all bank statements sent to your home. You can review these personally before giving to your office staff. Look out for overdrafts, wire transfers, or very large check amounts.
• Insist on seeing the bank reconciliations at the end of each month.
• Have your major credit card statements sent to your house for your review.
• Not only should you check references on employees, for any employee that deals with cash and other company assets have a background check performed. The expense of this is minimal compared to embezzlement.
• If your company purchases a lot of inventory periodically check behind the receiving activity to be sure you received and placed into inventory the items on the shipping manifest.
• When inventory is counted, be sure there are spot checks. Miscounted inventory can hide theft.
• Be sure all expenditures are approved by the knowledgeable person. If possible, use purchase requisitions. Again, if at all possible, match these requisitions with a receiving report to the invoice.
• Be concerned if you have an employee who never takes vacations. A fill-in for vacation may find something is not right.
• Develop a code of conduct that explicitly prohibits employees from committing fraud, conflict of interest and other illegal acts. This can be sent to vendors and customers. Consider asking key employees to confirm their compliance annually.
• Have a clear policy on time recording, expense reporting, and the receiving of gifts.
• Ask your employees to identify ways that employees could commit fraud.
• Do certain employees have a very close relationship with any vendors?
• Do certain employees have outside business interests that could conflict with your company’s interests?
• Be sure new vendors are valid. Verify the credentials before they become an authorized vendor. A false vendor can be set up to whom payments can be made.
• Also, be sure that any new customer is valid.
• Set the ethical example for employees to follow, treat them with respect and fair pay.
Fraud is a threat, but the good news is that the risk of fraud can be managed.
Bill Boyer is the President of CEO Focus of the Tidewater, a consulting/coaching organization for small company CEO’s. He can be reached at bboyer@ceofocus.com or 757-233-2577.
Fraud Prevention - To learn more about this author, visit Bill Boyer's Website.
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Recently, I have been surprised by the number of comments I have heard about instance of fraud in small companies. The Association of Certified Fraud Examiners in its 2006 report found that small companies had a disproportionate level of fraud loses. The median loss by organizations with less than 100 employees was $190,000. The median for all organizations was $159,000 or 5% of annual revenue. One of the most difficult ideas to accept is that fraud is commonplace and can happen at any business. Though no business owner wants to feel its employees’ unscrupulous people, sometimes the temptation of personal financial pressures can push even the hardest working, most trusted employee into perpetrating fraud.
A real life example. Tom had accomplished his goal: his business ran effectively without his daily involvement, including not signing checks. He had a signature stamp and only two people had access to it: the bookkeeper and his personal assistant. He thought there was sufficient oversight from each employee to eliminate problems. His assistant often ran company errands and used his company American Express Card. However, unbeknownst to Tom, his assistant was having financial problems at home. She started charging personal items or expenses to it at the same time as buying company items. Tom did not review the statements in detail, especially the individual receipts. Once this assistant realized that the statement was not being watched closely, she got more aggressive: groceries, television, and car expenses. She covered her tracks by intercepting the Amex statement the day it came it and paying for it by check using the signature stamp. The bookkeeper assumed it was fine as Amex was a valid vendor and they used it a lot. Tom finally realized that he had not seen a statement nor a check related to Amex in quite a few months and found a significant level of embezzled funds.
It is not as easy for small companies to prevent the temptation of fraud with separation of duties due to staff size. But there are many things you can do to help reduce the potential for fraud. Some of these are:
• Always sign checks. If your name is forged on a check that is the bank’s problem not yours. If at all possible have whatever backup is available (invoices, receiving document, and purchase requisitions) attached. It is also good if another person mails the checks.
• Have all bank statements sent to your home. You can review these personally before giving to your office staff. Look out for overdrafts, wire transfers, or very large check amounts.
• Insist on seeing the bank reconciliations at the end of each month.
• Have your major credit card statements sent to your house for your review.
• Not only should you check references on employees, for any employee that deals with cash and other company assets have a background check performed. The expense of this is minimal compared to embezzlement.
• If your company purchases a lot of inventory periodically check behind the receiving activity to be sure you received and placed into inventory the items on the shipping manifest.
• When inventory is counted, be sure there are spot checks. Miscounted inventory can hide theft.
• Be sure all expenditures are approved by the knowledgeable person. If possible, use purchase requisitions. Again, if at all possible, match these requisitions with a receiving report to the invoice.
• Be concerned if you have an employee who never takes vacations. A fill-in for vacation may find something is not right.
• Develop a code of conduct that explicitly prohibits employees from committing fraud, conflict of interest and other illegal acts. This can be sent to vendors and customers. Consider asking key employees to confirm their compliance annually.
• Have a clear policy on time recording, expense reporting, and the receiving of gifts.
• Ask your employees to identify ways that employees could commit fraud.
• Do certain employees have a very close relationship with any vendors?
• Do certain employees have outside business interests that could conflict with your company’s interests?
• Be sure new vendors are valid. Verify the credentials before they become an authorized vendor. A false vendor can be set up to whom payments can be made.
• Also, be sure that any new customer is valid.
• Set the ethical example for employees to follow, treat them with respect and fair pay.
Fraud is a threat, but the good news is that the risk of fraud can be managed.
Bill Boyer is the President of CEO Focus of the Tidewater, a consulting/coaching organization for small company CEO’s. He can be reached at bboyer@ceofocus.com or 757-233-2577.
Fraud Prevention - To learn more about this author, visit Bill Boyer's Website.
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