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Small Business Fraud Security

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In many small businesses, the "accounting or finance department" may consist of the owner and the bookkeeper.  Despite the heavy involvement of the owner, poor cash controls create a temptation and opportunity for theft. Add in a bookkeeper with unknown (to the owner) personal financial difficulties, and the situation is a textbook fraud case.  The bookkeeper finds a way to "borrow" a small amount of money, fully intending to pay it back, but soon realizes he/she can't afford to.  No one has noticed the first "loan", so they take another.  Over a period of time, these add up to a lot of money.

A study by the Association of Certified Fraud Examiners revealed nearly two-thirds of fraud crimes are committed by the business' employees, and 42% of all cases occur in small, privately-held companies.  On average, it takes 18 months to discover a theft from within with the median loss being $132,000.

The most important aspect of an internal control system is the concept of separation of duties.  Separating duties makes it more difficult for theft and errors to go undetected, and usually would require two employees to commit fraud together.

Common procedures for separation of duties include:

  • Invoices are reviewed and approved by an owner before the disbursements are made.  This not only controls costs but also begins a paper trail of approved cash disbursements.
  • Once the checks are created, the owner should be the only authorized check signer, and no signature stamp should exist.  This will allow a quick comparison of the prepared checks with the approved invoices to ensure vendor names and dollar amounts match.
  • Bank statements are received sealed and opened by the owner, and a quick scan of the month's activity should be performed.  Particular attention should be paid to the cleared checks to identify unfamiliar vendors, forged signatures, and dollar amounts.
  • If at all possible, bank reconciliations should be performed by someone who does not prepare the cash deposits and disbursements.  If the owner does not have the time, knowledge, or desire to perform monthly reconciliations, outsourcing the reconciliation process may be worth the cost.
  • Another method owners can utilize to reduce the likelihood of theft is to have regular oversight of the bookkeeping function.  Owner involvement in reconciliations and regular internal audits send a signal to all members of the organization who handle cash that internal cash control is a priority. 

Common opportunities for owner oversight include:

  • Occasionally perform cash drawer reconciliations at the end of a shift or the business day, reconciliation prior to a bank deposit, and regular bank statement reconciliations (as mentioned above).  These unannounced "spot checks" will help you show your employees that at anytime you may stumble upon a cash shortage, no matter how small.
  • Periodically open your QuickBooks (or other accounting system) file and create a Profit and Loss Statement as well as a Balance Sheet for the current month to identify anything out of the ordinary.  Ask a few questions of your bookkeeper after this review to alert them to the fact that you are looking at the books and know what you are looking at.  This "Impression of Control" goes a long way.
  • If you have employees, review payroll reports to prevent fictitious employees from being added, pay rates from being changed, and multiple paychecks going to the same employee.  These are all ways payroll fraud has occurred.  If you process your payroll internally, review and mail your payroll tax returns after your bookkeeper prepares them.

If you have any questions or would like us to assist you with the process of establishing an internal control system and performing periodic review of the above mentioned areas please contact us.