No? Well, you should have. All businesses should be worried about becoming victims of some fraudster. This is especially true for owners of small businesses that rely on staff and employees to invoice customers; deposit funds; process payroll; receive and ship merchandise or prepare financial statements.
The Association of Certified Fraud Examiners’ annual report (www.acfe.com) includes an estimate that the typical organization loses about 5% of its revenues each year to fraud. Its studies indicate that the average loss caused by frauds in their studies was $145,000. This statistic ought to get any business owner’s attention and thinking. And, the sooner the better.
What to do?
Some of our solutions are quite simple and just plain common sense.
- Hire the right persons in the first place
- conduct background checks, check references
- No absolute delegation to any single employee of financial tasks
- Two or more people involved to serve as checks on one another
- Understand what the business’ profit is supposed to be
- Compare your business to benchmark data for your industry and understand why you are different
- Review and analyze your monthly financial statements on a timely basis and discuss with your accounting person and other key employees
- Evaluate your business’ Key Performance Indicators; e.g., quick and current ratios, days sales in receivables and in inventories; realized gross profit rates; overhead and cost factors; discuss variations with key staff and personnel; identify reasons for any significant changes.
- Open the mail yourself, especially bank statements and make sure you know the signatory and payees on checks that have cleared; verify no unauthorized transfers
- Review and sign all the checks to vendors; review the vendor’s underlying invoices and the items being purchased for approval
- If you’ve delegated check signing authority review and approve after the fact
- Never allow anyone to transfer money out of your account, make sure the bank knows this is the rule.
- After signing checks, have someone outside of accounting, separate and mail them.
- Never pre-sign any check, for any reason
- Secure blank check stock; make sure you track the numerical sequence of checks being submitted for signature; investigate missing out-of-sequence checks.
- At least quarterly, review and approve every entry in your customer and vendor master files
- Review every payroll journal to ensure all employees are known to you, worked the time and hours reflected in their pay and received the proper rate of pay. Also ensure that any required deductions from employee pay for health, loan paybacks, garnishments, etc are in fact being withheld from the paychecks.
- Maintain security over inventory, supplies, small tools and other assets that can easily disappear. Take frequent inventories, investigate discrepancies.
- Increase your skepticism about most everything, discuss the fraud subject with your employees; ask for their help in reducing your risks.