Your small business is a target of fraud every day
As a forensic accountant, I know small businesses are more vulnerable to fraud attacks than most larger organizations. Those attacks and scams typically come in three specific ways:
- Activities undertaken by employees and other internal access threats.
- Outside invasions through the use of a variety of scams and cons.
- A combination of collusion internally and externally.
To help guard against such threats, small businesses can often take some simple steps.
Verify inventory on a frequent basis
Many years ago I had a nonprofit client that printed educational materials as part of its mission. Most of this was done as black and white photocopies on standard paper, folded in half, with a color paper cover and stapled in the middle. We traced a $3,000 annual budget deficit to a 600,000-page discrepancy (photocopiers have counters).
It turns out the print shop manager was in collusion with the paper supplier, and the inventory fraud had cost the nonprofit more than $10,000.
In this case, simply checking the counters in the copiers and comparing them to purchase volumes could have avoided the loss.
Regularly review credit card statements
Credit cards held in the company name or held by people in senior positions are often used to make a variety of purchases for small business owners.
Too often, employees take liberties and use these cards for personal items, clearly violating company policies. They add to the supply order, fill their own car with gas or buy friends a nice lunch on a Friday.
As time progresses and the small infractions go unnoticed, the employee gets bolder, such as buying plane tickets or purchasing tickets to a sporting event.
These purchases may also go unnoticed if they conform to the general types of expenses the company incurs as part of its normal business activities.
Review bank statements, transaction details, and canceled checks
I have heard too many stories about someone in the accounting department who wrote company checks either to pay for personal obligations or as a means to embezzle money.
In a recent matter, the perpetrator, a company accounts payable clerk, wrote checks of small amounts to herself, went to the bank and cashed them and then changed the payee in the accounting data to cover up the theft.
The fraud persisted for 10 years, amounting to more than half a million dollars. It was only uncovered by a new teller at the bank who got suspicious about the number of checks being cashed.
The fraud happened because simple, existing control points were ignored: No one ever looked at the canceled checks, bank reconciliations were done on a macro level and no one ever looked at the audit trail in the accounting software.
Of course, there are no assurances that all internal fraud can be avoided or eliminated. The creativity of fraudsters continues, even in the wake of greater oversight and more modern accounting software and tools.
However, by using some basic and fundamental common sense and implementing standard internal controls, small business owners can avoid many common internal frauds.
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This article was written by PAUL POCALYKO from LNP; Lancaster, Pa. and was legally licensed through the NewsCred publisher network. Please direct all licensing questions to firstname.lastname@example.org.
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