7 Keys to Preventing Fraud in the Workplace

In small business accounting, honest mistakes happen. Dishonest mistakes happen too – all too frequently. Both can be prevented with the proper processes and procedures for cash handling and accounting … but only if you are on the lookout.

Think it couldn’t happen to you?  Think again: most fraud happens in smaller companies, because they lack the controls and procedures to prevent it.  In fact, more than 31% of companies with fewer than 100 employees will experience some kind of embezzlement or check fraud, the highest rate of any business size category. (Association of Certified Fraud Examiners 2012 Report).

The more you know about preventing fraud, the more you will want to examine your own cash and accounting practices.  Consider these other stats from the same report.

  • The average small business loss was $147,000, but more than 20% of those losses exceeded $1 million!
  • Nearly half (49%) of the victim organizations do not recover any of the fraud-related losses.
  • Most occupational fraud perpetrators are first-time offenders with clean employment histories. Approximately 84% had never been charged with a crime or terminated by previous employers.
  • Occupational fraud generally lasted approximately 18 months before being detected.

What do embezzlers “look like”? Fraudsters come in all shapes and sizes, but a Marquette International study on embezzlement in business found that the guilty employee was more likely to be: a woman working in the accounting or bookkeeping role and acting alone.  Who would think that a single bookkeeper could steal an average of $17,656 per month from her small business employer?

Preventing fraud starts by watching employees for the 4 big ‘D’s —  warning signs for problems include Debt (a significant driver being gambling), Divorce, Drugs and Disgruntlement.  Don’t see these issues in your workforce?  Don’t get complacent.  Fraud and embezzlement are crimes of opportunity.  If you don’t have the right procedures in place to prevent it, you’re asking for trouble. It is imperative to set up a framework for protection.

No matter the size of your company, below are a the seven fundamental steps you should take to help prevent employee payment fraud and embezzlement:

  1. Periodic Financial Reviews. I find that an owner, even if not involved in day-to-day accounting, has an intuitive sense of the business that can sniff out irregularities if they take the time for a monthly review.  Sit down with the accounting staff and a copy of the financial statements, including the General Ledger.  Ask questions and check expenditures and explanations that just don’t seem to make sense.
  2. Separate the Financial Duties. This can be very difficult within single person accounting organizations, but there are steps that can help. To the extent possible, divide complementary accounting duties (recording vendor invoices and paying those invoices) between at least two people.   If you are a small organization, it may be necessary to utilize non-finance staff (a receptionist) for getting, opening and categorizing mail.  This could help uncover delinquency notices (one sign of fraud) and ensure that customer checks are properly received and recorded.
  3. Enforce Vacations.  Regardless of how many staff handle the accounting function, requiring that employees with sensitive jobs take vacation can shed light on the darkest corners of their job.  If there are mistakes, intentional or accidental, the ‘fill in person’ has the ability to notice where processes are not being followed.
  4. Use Purchase Orders. Using purchase orders – and requiring an approval signature – helps to eliminate unnecessary purchasing of ‘stuff’ and also serves to prevent fake or falsely inflated payments to vendors.
  5. Be the Last Person to Touch the Checks. Check tampering is one of the most common forms of fraud. When you sign the checks by hand (never use a rubber signature stamp), don’t hand them back to someone else for distribution.  Mail them or, in the case of payroll checks, pass them out yourself.  Also, when signing vendor checks, make sure the corresponding invoice being paid is attached for review.
  6. Double Check Payroll. In slightly larger companies, or those with a lot of turnover, payroll tends to be an easy target for embezzlers.  Be sure you know exactly who is working and who has left the company.  You may be surprised to find that a long-gone employee is still being paid.</li>
  7. Make it Everybody’s Job. Protecting the company’s assets (especially cash) from fraud should be everyone’s job.  Involve multiple people in sensitive financial and inventory processes; have them double-check work to prevent mistakes.  Let sales people audit their customer accounts.  Give warehouse workers the full story about what is (or should be) on the shelf.  And most important, make it safe for any employee to report unusual activity directly to you. Use the power of your crowd to verify that your company is not “leaking” money.  Just having these checks in place will be enough to deter some cheaters.

Discovering employee fraud is just the beginning of the nightmare.  In addition to the money lost to fraud, the clean-up expense can run just as high.  Are audits necessary? Are there missed payments that have penalties added to them?  Dealing with it can involve the police, and of course HR issues with the employee.   Be careful not to accuse the wrong person, but when the evidence is certain, then it’s your job to take swift and decisive action.   Bringing in law enforcement early is often the safest decision you can make — and much better safe than sorry.

Prevention is still the best remedy.  Start with a thorough audit of your business in light of the processes described above.  Look at the policies and procedures you have in your accounting department.  Take necessary steps today to catch and prevent problems tomorrow.

Want to learn more? Fuse Financial Partners offers a 3-hour “Fraud Audit”. Let a FUSE expert examine your finance procedures for ways that you may be exposed to fraud or embezzlement. To find out more, contact me at 980-329-8014… or use the contact form on this page.

Dedicated to your success,

David Worrell
FUSE Financial Partners

photo credit: AndyWilson via photopin cc

Originally Published

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