Accounting fraud is an all too common occurrence in the business world today. It’s also the small business owner’s worst nightmare. As such, it’s something they must guard themselves against constantly. If you own a small business, don’t make the mistake of thinking that accounting fraud is something that only happens to large corporations. This recognition is the first step you can take to prevent the massive damage that business fraud can cause.
Accounting Fraud: The Usual Suspects, Practices, and Victims
Typically, small to medium-sized business (SMEs) are more likely to be defrauded by their employees than larger ones. The damage from fraudulent practices is usually greater as well. The most common types of company fraud usually into one of three categories:
- Asset misuse
- Theft or misappropriation of funds
- Financial statement fraud
Not surprisingly, studies have suggested that theft— or the misappropriation of funds – is the most common form of fraudulent activity that businesses experience.
When it comes to theft, company employees are usually the culprits. Employee theft can happen in a number of different ways, either through bogus expense claims, taking company property, or directly stealing cash. This is a difficult fact for many employers to accept, as many small business owners think of their employees as friends or part of an extended family.
In addition to theft, SME owner/managers must also be wary of general corruption like kickbacks and other fraudulent schemes in which employees benefit by violating the responsibilities they have to their employer.
There are several reasons that SMEs face greater fraud risks than larger companies usually do:
- The close relationships that exist between the employees of a small business mean less scrutiny
- Employees often serve more than one function when they work for a small business
- Small business owner/managers often have little to no financial expertise
- Generally speaking, small businesses have fewer formal oversight procedures than larger companies
Perhaps most importantly, even a ‘minor’ act of fraud can have a major impact on a small business’s cash flow and overall fiscal health. These factors make it essential that SME owner/managers take measures that help detect and deter accounting fraud as soon as they can.
Here are nine measures you can take to help prevent accounting fraud from destroying your business.
1. Segregate Financial Duties to Prevent Accounting Fraud
Far too many small businesses have a single person in charge of bookkeeping tasks like paying invoices, payment processing, accounts receivable, handling of petty cash, and recording these transactions in the company’s accounting system. This level of freedom might seem necessary given your business’s small size, but it still makes fraudulent activity very difficult to spot.
That’s why every business – no matter what size – should have two or more people managing their bookkeeping duties. One way to accomplish this is to have everyone trained to do every bookkeeping task. Another option is to separate cash dealings and accounting tasks completely. Lastly, many companies outsource their bookkeeping duties to online CPA firm services to keep things separated.
2. Know Your Staff Well
Although every business works to hire honest employees, a formal hiring routine is usually required for maximum protection against fraud. Even if your business is very small, you should perform background checks on any employees with access to banking information or cash. The scrutiny you place upon an employee should increase in direct proportion to how frequently they interact with company finances of any sort.
Surprisingly enough, employees who engage in fraudulent activities are often some of the most helpful employees you have. This helpfulness tends to endear them to their co-workers and supervisors alike, with the end result being extra duties and inadequate oversight. On the other hand, employees are more likely to commit fraud when they’re facing an unexpected financial challenge. If you suspect fraudulent activity, something as simple as requiring your team to take their vacation can help uncover it.
3. Maintain Vigilant Internal Controls
Just like large corporations, small businesses must have proper internal controls in place to detect or prevent fraud. These controls can include things like:
- Limiting employee access to financial information
- Restricting access to company inventory
- Implementing two party sign-offs on employee reimbursements, check writing, and other payroll functions
- Regularly reviewing audit documentation to guarantee the soundness of the financial books
4. Audit Your Finances Regularly
In order to prevent accounting fraud, your business should regularly audit any areas that touch upon cash transactions, product return, customer refunds, and accounting duties. You can also use unscheduled audits to help prevent fraudulent activities in high-risk areas.
5. Train Staff Members to Help Prevent Fraud
Sometimes, your employees themselves offer the best protection against accounting fraud and other dishonest activities. That’s why employees who work in sensitive areas should learn the signs of possible fraud. They should also learn fraud prevention skills and know how to report suspicious actions by their fellow employees. For best results, set up a reporting system that protects the identity of the person filing the report.
6. Know Your Business Partners
Before entering a relationship with an individual or another business, learn as much as you can about them. Knowing a business partner’s physical address is one of the best ways to prevent fraud. Also, be sure to check their references thoroughly and have alternate contacts within the organization.
A simple internet search of the entity you’re considering should provide you with enough information to know if they’re actually a legitimate business and how long they’ve been in operation. Other dependable sources of this kind of information include government commerce departments and the Better Business Bureau.
7. Safeguard Credit Card Information
There are so many cases of credit card fraud in the news these days that it’s easy to become desensitized to it. However, every sized business still has an obligation to prevent the illegal use of customer credit card information.
You can start by maintaining a clear separation between your business and personal accounts. Mixing these together can lead to very expensive mistakes, as well as make you vulnerable to losses at both ends if a breach happens to occur. As an aside, this practice will also make it that much easier to track business expenses.
Lastly, companies should always be very cautious when sharing credit card information with others. They should consider using online bill payment services whenever possible as well. This will reduce or eliminate the risk of check theft or fraud.
8. Follow Up on Every Case
A failure to investigate suspicious activity will negate the value of any fraud prevention controls you’ve put into place. Even if you have a small suspicion, it’s essential to follow up. This is the only way to reinforce your business’s policies against fraudulent activity. Anything less will only encourage other employees to commit more damaging acts of fraud in the future.
9. Seek Help from an Outside Expert
If the fraud prevention measures you’ve taken don’t seem to be working, it’s probably time to bring in a professional auditor or accountant. They can perform an in-depth review and audit of your business’ control procedures and bookkeeping practices. Certified Fraud Examiners and CPAs can offer extensive help when it comes to preventing accounting fraud. They can also serve as expert witnesses in court, should the need arise.
About Lena Georgiev Consulting Services
Lena Georgiev provides accounting, bookkeeping and tax solutions that fit the needs of small businesses and individuals. Lena also has project management as well as life coaching skills which help clients with organization and real life advise. Call now for a free estimate on services!
Email: [email protected]
Phone Number: 847-420-8242
License Title: Registered Certified Accountant in the state of Illinois
License ID: 239.002263