Whenever a new high-ranking executive from some prominent organization gets involved in a case of embezzlement or fraud it makes headlines around the world.
As a small business owner, you probably think your business is immune to theft and fraud because:
- You know all of your employees, so this will never happen to you.
- You are close friends with all of your employees, so this will never happen to you.
- Your employees are members of your family, so this certainly will never, ever happen to you.
And unfortunately, you would be wrong.
What are the experts saying?
According to the Association of Certified Fraud Examiners’ (ACFE) 2016 Report to the Nations, asset misappropriation was by far the most common form of occupational fraud, occurring in more than 83% of cases. In fact, the median loss for small organizations (those with fewer than 100 employees) was the same as those incurred by the largest organizations (those with more than 10,000 employees).
While employee fraud prevention may not be top of mind for you, consider this:
Smaller organizations rarely recover any losses, meaning the impact can be substantially greater for smaller businesses than to larger corporations.
Image attribution: Association of Certified Fraud Examiners
The ACFE describes 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, it’s typically the person handling the bookkeeping
You count on this person to the know the numbers. You trust them. They are your right-hand.
In other words, the person you least suspect is usually the one who commits the crime. This individual sees all of the revenue coming in. They see what personal expenses you are writing off. They think to themselves, “I deserve a little of that pie.” What may begin as $20 here and there can soon spiral into hundreds of thousands of dollars stolen.
You don’t want to find yourself in that position.
What can you do to protect your business from employee fraud?
Don’t wait for a fraud to occur before putting processes in place to prevent it. Take a proactive approach. Studies show that the more employees believe they will get caught, the less likely they are to commit fraud. Below are some practical tips for small business owners to reduce the risk of loss due to employee fraud:
- 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 does uncover fraud, it may have been occurring for 12 months or longer before it is even discovered.
- 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 may include:
- Recording and processing transactions
- Sending out invoices
- Collecting cash
- Making deposits
- Routinely review financial information: If you have a very small team and segregation is not possible, the business owner or an outside accounting firm should review the bank statements (preferably online or before they have been opened by the accountant) and bank reconciliations on a monthly basis. 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.
- Ensure accounting oversight: Hire an outsourced accounting firm to provide oversight and support of the in-house staff. They will start by reviewing your accounting controls in order to make recommendations for improvement or to take on some of the accounting activities.
- 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.
- 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.
Background checks and hiring practices themselves are not enough to protect your business from employee fraud. In fact, according to the ACFE’s 2016 Report, the vast majority of occupational fraudsters are first-time offenders with only 5.2% having been charged or convicted of a prior fraud-related offense.
How can we help?
Our team ensures that our clients have preventative controls in place. We provide an appropriate level of oversight for the company’s 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.