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How To Protect Your Small Business From Employee Fraud

How To Protect Your Small Business From Employee Fraud

Whenever a high-ranking executive from a prominent organization gets involved in a case of embezzlement or employee fraud, it makes headlines around the world.

These are a few more well-known examples of fraud:

  • Dane Cook, an American comedian, whose brother who was his business manager and took advantage of him for about $12 million
  • Girl Scout parents who were caught stealing money from their daughter’s cookie sales (average estimates of $10,000)
  • Bernie Madoff, an American market maker, investor, and financial advisor, who committed the highest financial fraud in US history worth almost $65 billion

These examples might seem unlikely to happen to your company, and as a small business owner, you may believe your organization is immune to theft and fraud.

After all, who else knows and understands their employees best if not for you? In your heart of hearts, you likely believe they would never do something like embezzling money. If anything, you have a rigorous hiring manager who conducts thorough background checks, so, therefore, no potentially malicious individual could be brought on to your team.

Unfortunately, your thinking would be flawed.

Read More: 5 Ways to Improve Internal Accounting Controls and Oversight in Your Business

What Advice Do Fraud Experts Give?

Any employee, when presented with the right set of circumstances, is capable of committing fraud.

According to the Association of Certified Fraud Examiners’ (ACFE) 2018 Report to the Nations, asset misappropriation was by far the most common form of occupational fraud, occurring in more than 89% of cases and leading to losses upwards of $110,000.

Small businesses can be especially devastated by fraud, as these companies often have fewer resources to prevent and recover from malicious acts.

Organizations with less than 100 people often must trust their employees with more information compared to businesses with many more workers with the ability to have anti-fraud controls in place.

While employee fraud prevention may not be top of mind for you, consider that the median loss for small organizations was almost twice as high as those incurred by organizations with more than 100 employees.

The ACFE reports two key reasons why small businesses have an increased risk of employee fraud:

  1. a lack of basic accounting controls
  2. a higher degree of misplaced or assumed trust

In a small to medium-sized business, the employee handling the bookkeeping is most likely to be the one to commit a crime as they can see all of the numbers, and they have your trust. However, in small businesses, there is a 29% chance that the owner or executive is the one who will commit fraud.

Read More: How To Spot Employee Fraud

How Basic Accounting Controls Can Make A Difference

Often, company leaders believe that spending an excessive amount of money on implementing complex systems of controls will save their company from employee fraud. This is not the case.

Complex controls can surely make a positive impact, but most often, starting with the basics can set you ahead of the curve.

In the ACFE 2018 report, it was noted that internal control weaknesses were responsible for nearly half of all frauds committed. Businesses that had implemented anti-fraud controls had lower losses overall, which means that these controls are working to keep the company safe.

The report also found that when businesses routinely monitor and audit their back-office functions, fraud is reduced. Even with the information found on how these controls can make a difference, only 37 percent of businesses polled had these internal controls in place.

If you would like help implementing internal controls, even at the most basic level, you can reach our team of experts at any time. Our experienced team can make recommendations based on the industry you are in, the size of your company, and the budget you have in place. Protecting your business from fraud is imperative.

What Can You Do To Protect Your Business From Employee Fraud?

Don’t wait for a fraud to occur. It is essential to be proactive and preventative and put processes in place.

Studies show that the more employees believe they will get caught, the less likely they are to commit fraud. Below we have outlined some practical tips for small business owners to reduce the risk of loss due to employee fraud:

  1. Don’t depend solely on external audits: External audits are usually performed once per year and months after the year ends. Even if the audit uncovers fraudulent activity, it may have been occurring for 12 months or longer before being discovered.
  2. Segregate accounting duties: Avoid allowing the accounting function to be controlled by a single individual and segregate accounting duties in key areas instead. Such duties and responsibilities may include:
    -Recording and processing transactions
    -Sending out invoices
    -Collecting cash
    -Making deposits
  3. Routinely review financial information: If you have a small team and complete segregation is not possible, the business owner or an outside accounting firm should review the bank statements (preferably online or before the accountant has opened them) and bank reconciliations every month. Vendor payments should also be periodically reviewed. A common scheme is to set up fictitious vendors and manipulate bank statements with photo editing software before printing and filing them for review.
  4. Ensure accounting oversight: Hire an outsourced accounting firm to provide oversight, support, and possibly management of the in-house staff. They will start by reviewing your current accounting controls, workflows, and processes to make recommendations for improvements, implementing best practices, or even take on some of the accounting activities.
  5. Get fraud insurance: Purchase a bond or fraud insurance to protect your business if a theft does occur and/or have trusted employees who handle the finances bonded.
  6. Require your bookkeeper to take a vacation: Embezzlement and other types of fraud require a constant paper trail to go undetected. Therefore, business owners should insist that employees who perform the company’s accounting/bookkeeping duties take a vacation every year and designate a backup person to cover their responsibilities during that leave. Ideally, the vacation should be at least a week-long and occur over a month-end when the books are being closed. Assuming your books are closed monthly, this is not an easy request with a small team and another reason to build a trusted relationship with an outside firm.

According to the ACFE’s 2019 Benchmarking Report, 58% of organizations have inadequate levels of anti-fraud staffing and resources. For your company, this may mean conducting background checks will not be enough to protect your company from in-house fraud.

How Can I Protect My Company?

By partnering with the Signature Analytics team, we can recommend industry-specific suggestions for your company. We help our clients put preventative controls in place and provide an appropriate level of oversight of their financial books and records to ensure accuracy.

Signature Analytics provides small and mid-sized businesses with the resources of a full finance and accounting team. We utilize a fractional accounting model so clients can effectively segregate accounting duties without having to hire additional full-time accounting staff.

To learn more about how we can help ensure your business has fraud prevention, contact us for a free consultation.

5 Ways to Improve Internal Accounting Controls and Oversight in Your Business

5 Ways to Improve Internal Accounting Controls and Oversight in Your Business

Earlier this year, a company approached us after identifying some unusual checking activity while their bookkeeper was out of town for a week at training. They asked us to come in to look at all of the activity and determine if their accounting records were accurate. One of our accounting managers went to their office the following day to review the books (while the bookkeeper was still away at training) and identified that the bookkeeper had been colluding with a vendor to issue fraudulent payments and splitting the proceeds.

Needless to say, the company fired the bookkeeper for theft. The company requested that our accountants take over the role until they could find a replacement and we have continued to provide ongoing internal control accounting support to the company, including oversight for the new bookkeeper.

As a business owner, often your main focus is on the operations of the business. We have worked with several business owners who did not make financial information a priority, instead of focusing only on revenue. We work with other business owners who also recognize the importance financial statements play in understanding the state of the operations of their assets; however, with the best of intentions, they delegated the accounting work to an available employee (such as an office manager or admin), or to a bookkeeper with little to no accounting background, while providing no oversight at all.

How to Protect Your Business From Employee Fraud

Employee fraud is more common than you may think, with small organizations (those with fewer than 100 employees) being the most common victims of organizational fraud. As a business owner, you have to take the necessary steps to ensure you’re protected.

Here are 5 ways to improve internal controls and oversight within your organization to help protect your business from employee fraud:

1. Segregate Accounting Duties

Small businesses usually depend on one employee or a bookkeeper to ensure the process in all aspects of the accounting process, including authorization, execution, custody, and posting of transactions. Ideally, the processing of cash receipts and payments will be separated, with segregation of duties with different people approving invoices, preparing checks, signing checks, and reconciling the bank accounts. Allowing one individual to handle cash or checks received, the deposits, and the posting of payments in the system increases the risk of fraud. These processes should be segregated among different individuals. If this is not feasible for your organization, it is advisable to rotate individuals performing the above tasks periodically.

Additionally, you could use an AP risk and control matrix to help your company assess and minimize inherent risks resulting from faulty accounting data and residual risks, which can remain even with good controls. AP automation providers, like Sampli, can help companies prepare AP risk and control matrices by keeping detailed and easily accessible accounting data, which gives business owners and CEOs a complete picture of what they’re up against.

You could also consider the use of an online payment service that can be accessed anywhere and provide you with increased account control over the payment process. Bills and payments can be authorized conveniently prior to any cash disbursement. If your situation still warrants physical check policies, consider signing them yourself or authorizing an additional signer. Ensure objectives that the signer is separate from the person issuing the checks and that the signer matches the checks to invoices prior to mailing. Finally, be sure to store blank checks in a safe place restricting access to avoid risk.

Free Download: Discover how outsourced accounting can provide more visibility into your business

2. Restrict Access to Financial Systems

The most common accounting software used by businesses gives its users the ability to edit and delete previous transactions which could lead to easy concealment of theft. Business owners should retain ADMIN rights (if possible) to the company’s accounting system and consider restricting user access to only areas necessary for their functions. This will help reduce the chances of an individual creating false entries and covering up their tracks. A review of voided and deleted transactions will show any adjustments or deletions and can be instrumental in exposing irregularities in procedures.

If approval rights are granted to an employee or bookkeeper in your online payment service, a review of credit memos should be performed to ensure the validity of issued credits and deter the creation of false credit memos to cover any intercepted cash.

3. Increase Oversight

Internal controls without oversight are not good enough. You, or a trusted resource, should diligently review bank statements, check or payment registers, and bank reconciliations regularly. Review payroll statements for phantom employees and unapproved raises, hours, or even expenses. Impress upon the employee the need to keep supporting documents and you should periodically review some transactions and supporting documents for validity and accuracy.

Most importantly, business owners need to follow policies and procedures to make it a priority to review financial reports and understand the trend and changes in the business’s financial data. There should be a focus on understanding month over month or quarterly fluctuations as well as variances between budget and actuals.

4. Have Financial Statements Reviewed by a Third Party

To support bookkeepers and other in-house accounting efforts, business owners should consider utilizing their CPA to periodically review the financial statements. An individual who knows that the work performed will subsequently be reviewed is more likely to be deterred from committing fraud. An outside accountant can be instrumental in identifying inaccuracies and inconsistencies in the financial records as well as helping business owners better understand the procedures of their financial data.

Free Download: Discover how outsourced accounting can provide more visibility into your business

5. Require Employees to Take Vacation

In the client example mentioned earlier, the company identified the unusual checking activity while their bookkeeper was out of town for training. Embezzlement and other types of fraud require a constant paper trail cover-up in order to go undetected in accounting records. Therefore, business owners should insist that employees who perform the company’s accounting/bookkeeping duties take a vacation every year and designate a backup person to cover their responsibilities during that leave. Ideally, the vacation should be at least a week-long and occur over a month-end when the books are being closed.

Read more: Employee Fraud is More Common in Small Businesses – Are you Protected?

We Can Help

Signature Analytics provides small and mid-sized businesses with the resources of a full accounting team on an outsourced basis, so our clients achieve effective segregation of accounting duties without having to hire additional full-time accounting staff. We ensure that all of our clients have preventative controls in place and provide an appropriate level of oversight and challenge for the company’s financial books and records.

To learn more about how Signature Analytics can help ensure your business is protected from employee fraud, contact us for a free consultation.

 


 

Discover how outsourced accounting can provide more visibility into your business