Adopt key practices for preventing internal fraud

Many business owners are discovering that their assets are not as well protected as they thought.  Small businesses are susceptible to fraud most commonly due to lack of internal controls.  There are a few key practices that can help prevent fraud in your business.

One of the most important internal controls is segregation of duties.  This means responsibilities are assigned in a way that prevents one employee from having too much control over a process.  This is a challenge for many small businesses simply because there are often not enough bodies to allow for proper segregation of duties within the business.  For example, when a bookkeeper writes the checks to pay invoices and also manages the monthly reconciliations of the bank accounts, that person has too much control over the cash of the business.  Unchecked, the bookkeeper could easily write checks to him- or herself and disguise the fraud from the business owner.

The most important way to prevent and detect fraud is for business owners to review records regularly. Be sure to pay close attention to cash and safeguard access to your accounts and credit cards.  Here are some questions to consider:

  • Are you reviewing the checks that are written to confirm you recognize all the payees?
  • Are you verifying that your cash deposits make it into your bank accounts each day?
  • Are you reviewing invoices before you pay them to ensure you are not paying for goods or services that you did not order or approve? Do you recognize all the vendors?
  • Are you utilizing your bank’s fraud protection features such as Positive Pay and zero balance or sweep accounts?

Management or owner oversight is an important fraud deterrent.  Employees are less likely to take advantage of an employer if they know that management is actively involved in the business and reviewing their activities.

Another important practice is to require employees to take vacations and have someone else handle those responsibilities in their absence.  Again, if the employee knows that someone else will be checking behind them, they are less likely to do something they should not do.

Performing background checks on potential hires is another way to help mitigate fraud risk.  Those who have histories of drug abuse or gambling debts could be more prone to financial pressures that would cause them to commit fraud.  Also be aware of behavioral or lifestyle changes in your employees that could be signs of trouble.

The best way to safeguard your company’s assets is the recognize and improve weaknesses in your internal controls and procedures. There is no guaranteed way to prevent fraud from occurring, but implementing some of these procedures can help you reveal discrepancies as well as recognize the excellent efforts of your staff.

Lindsey Pierce, CPA, is a Partner with Antares Group, Inc. She can be reached at lpierce@antarescpas.com.

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