Fraud! Is Your Small Business At Risk?

There are many small businesses at risk for fraud. Small businesses lack the resources to separate duties and usually, it all falls under one bookkeeper to handle all the finances. This is a usually a major risk area for many small businesses.

Fraud prevention can be easily eliminated

Many small business owners feel that they are too small to implement simple fraud prevention techniques because they don't have the means and usually, big businesses are able to accomplish this the correct way. Other's don't have the time, and 'hope' that the person they've hired will do the job accurately and be trustworthy.

Outsourcing a bookkeeper has been found to reduce fraud in small businesses.

According to the Association of Certified Fraud Examiners, in the 2018 global study on occupational fraud and abuse, there were 2,690 real cases of occupational fraud.

• $7 Billion + in total losses
• $200,000 average loss per case in small businesses alone
• 22% of cases caused losses of over $1 Million +
• 16 months was the average duration of fraud
• Internal control weaknesses were responsible for almost half of the frauds discovered
• $339,000 average per loss was caused by collusion
• Only 4% of employees had a prior fraud conviction
• $0 recovery in the majority of the cases

Why do we touch on this?

No small business is safe from fraud. There are ways to reduce the instances of fraud in your small business by simply adopting an internal control structure.

An internal control structure protects the business's assets against theft, ensures that the company's employees are following company policies. The performance of all personnel is evaluated to promote professionalism and efficient operations. This can lead to accurate and reliable information. It all starts at the top with the owners and it trickles down to all the employees.

Preventing fraud starts below:

• Segregation of duties
• Assign duties to each employee
• Employee job rotation
• Record keeping
• Employees

Segregation of duties

In small businesses, it is difficult to separate job functions. One full charge bookkeeper, or a family member might manage all the finances in the company. Putting full trust on one person from handling the cutting of checks to the receipt of payments can put your business at risk if you have the wrong person in the job. We're not saying that you might not have that dime a dozen, but it is better to be safe than sorry.

In segregating the duties, one employee will process one part of the transaction and the other employee the second part. For instance, one employee might enter all the invoices for vendor payments, while the other employee cuts the checks for you to review and sign.

When a company segregates the duties of its employees, it minimizes the possibility of theft and or collusion.

Some examples that could help small businesses with one employee would be:

• The owner is the only one with bank account passwords
• The owner reviews invoices and signs all checks
• The owner reviews the bank statements monthly and reconciles them

By having the owner of the business involved in the financial activities of the business, the employee will not want to put themselves in a situation where they could get caught for stealing money.

In other words, the owner will review each bank statement and reconcile them monthly, sign all checks with invoices attached to them, and is the only one that has access to log in to their bank account.

Assign duties to each employee

Accountability is the most important part of a business. Without accountability, there would be no responsibility in your business. When a company assigns duties to their employees, they are held accountable should something go wrong. The company could then quickly identify the responsible employee and work to resolve the situation. Accountability can also drive employees to want to do their work correctly. Recognition gives employees motivation to do what is right. In most circumstances that is.

In other words, each employee is responsible for their job duties. The company can then follow up if there are any issues in that specific area, they know which employee is responsible.

Employee job rotation

Rotating your employee's job functions can discourage employees from theft. If a company rotates their employee's responsibilities, the next employee could realize their scheme and if they are not aware would report it. Many companies are starting to adopt mandatory annual vacations for each employee. Theft tends to fall apart when he employee is not there to control the functions.

In other words, if your employees are put in another's job and they are learning it, it could uncover fraud or schemes that were being managed my a certain employee or employees.

Record keeping

Small companies should keep a clean and complete accounting record. A good bookkeeper will keep all receipts for seven years and have clean and organized records.

In other words, if an employee is fired or left and they committed fraud, a company that keeps records of all transactions can go back and review what was stolen. Generally, files should be kept for 7 years.

Employees

Background checks are extremely helpful, but not always accurate if the previous employer did not report a theft against the employee. Internal control policies are as effective as the employee if and only if they follow them. Hiring the right employee and taking the time to train these employees is essential to having a successful business.

In other words, the work you put into finding the right employee is key to the success of your business. It is not fool proof since we're all subject to human error, but, it can give you the peace of mind when you do things the right way and don't rush.

Solutions?

Not all small businesses have the ability to make changes to their processes. Resources might not be available and the company might not know how to implement these changes. Small changes make the best changes since the gradual change becomes a habit over time. Outsourcing your bookkeeping can be a first step to make sure that you have a professional accountant taking care of your finances. This can help reduce the stress of the possibility of fraud in your business.