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Better Business Idea #75

Time to "Brush Up" on Fraud Prevention

© 2008 by Michael C. Gray

November 3, 2008

As employers and business owners, we hate to even admit the possibility that employees, customers or suppliers could steal from us or that we could otherwise be victims of fraud.

One of the tasks of the business owner is to protect the company’s assets. The old proverb "An ounce of prevention is better than a pound of cure" applies to setting up systems and procedures to protect yourself and your business from fraud.

Tax return preparation services provide almost no protection from fraud. Neither do compilation or review financial statement services. Financial statement audits provide some fraud protection, but they mostly focus on the "big picture" and may miss the details indicating a fraud.

Here are a few suggestions to protect yourself. It is not complete. Looking at these items may inspire you to have a conversation about fraud avoidance and detection with your business advisors or with us.

  1. Be aware that some of the biggest frauds are perpetrated by individuals in management positions or other trusted employees responsible for accounting and handling assets. (Yes, darn it! Close friends and family members, too!)
  2. Although we recommend pre-screening investigations when hiring employees, many frauds are committed by first-time offenders.
  3. The biggest source of information leading to stopping a fraud is an anonymous tip line. Your company should have written policies and periodic meetings telling people about the availability of an anonymous tip line and a policy that "whistle blowers" will be protected.
  4. If employees who are supposed to be internal control "checks" on each other collude together to commit a fraud, it can be disastrous. Additional "checks" need to be in place.
  5. A basic control is for the bank statement to come to the home of an individual who may not be writing the checks – usually the business owner. The cancelled checks or cancelled check copies should be inspected for irregularities. Do you recognize who these payments are being made to?
  6. Follow up on items on the bank reconciliation, including deposits in transit and outstanding checks that aren’t clearing.
  7. Never sign a blank check, even when you go on vacation!
  8. Have you heard of "positive pay"? This is a service where a list of payments, including the check number, amount, and payee are provided to the bank for matching.
  9. Don’t let cash receipts accumulate. They should be deposited regularly.
  10. Consider having a "lock box" service for cash receipts, to avoid having employees handle the deposits.
  11. As a company grows and can afford it, more internal controls should be installed, including an internal audit department or an external "spot check" internal audit service.
  12. Watch for lifestyle indications of fraud. Can your bookkeeper afford that car or vacation home with the salary that you pay him or her? Expensive jewelry?
  13. Are there any signs of financial stress that might tempt someone to steal? You might not know if that person has a gambling problem or uses cocaine. Is there a serious illness in the family?
  14. Be sure everyone takes a vacation so someone else has to cover duties and see if anything "pops out."
  15. Periodically get transcripts of accounts for sales taxes, income taxes and payroll taxes. Employers have been held liable when payroll tax service companies failed to make tax deposits!
  16. Make periodic physical inventory checks.
  17. Be alert for anything that doesn’t seem right and follow up on irregularities!

If you would like to discuss this further, call Michael Gray at 408-918-3161.

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Michael Gray, CPA
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