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Better Business Idea #69

Are you alert for fraud in your business?

© 2004 by Michael C. Gray

October 1, 2004


For a small business, the effects of fraud can be devastating. I once met a fellow whose bookkeeper made the payroll tax deposits for his business to her own account. He didn’t just lose the cash, he had huge debts for payroll taxes plus interest and penalties! It was questionable whether he would survive this disaster.

I recently attended a class on Searching for Fraud. The instructor was a former SEC auditor. He pointed out that civil fraud, unlike criminal fraud, doesn’t require intent. Reckless behavior resulting in a financial loss to others can be a civil fraud.

Public companies are now in the process of complying with new rules under the Sarbannes-Oxley Act to document and implement internal controls to protect corporate assets from fraud. The independent auditors have been directed by the American Institute of Certified Public Accountants in Statement on Auditing Standards 99 to not just rely on audit checklists but to actively discuss where fraud might occur for a client and how they might find it. Thinking is required!

What about small, private businesses? Most small businesses don’t have their financial statements audited. Many don’t even have their financial statements prepared by a CPA firm. They generate their records and financial reports using computerized accounting software. Computerized accounting software enables a business to do its record keeping with fewer people, eliminating “checks and balances” that once existed with large accounting staffs. In other words, most small businesses are highly vulnerable to fraud, because no one is looking!

Here are some suggestions to help protect your business from fraud.

A very basic control for any business is for the unopened bank statement to be delivered to a person outside of accounting (often the CEO), who can inspect the cancelled checks for irregularities. Do you know these vendors? Do the amounts paid seem appropriate? Are all cash receipts being promptly deposited? The bank account(s) should be reconciled monthly.

Interim financial reports should be generated no later than the 15th of the following month. The CEO should be analyzing the (timely-prepared) corporate financial statements. Does the cost of sales seem appropriate for the level of sales? Does the inventory balance look in line for what is on hand?

Never sign blank checks for bills to be paid when you’re away from the office.

Be alert when an employee has an unexplained improvement in lifestyle that doesn’t fit with his or her family income level.

Someone other than the accounting office should be opening the mail. Tax notices should go to the CEO.

Consider having a consultant or auditor review and test your internal controls.

The survival of your business and your reputation with investors and creditors depends on your business being run as a "tight ship."

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Simple suggestions to protect your small business from fraud.


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Michael Gray, CPA
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