The basics of preventing fraud in any business

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fraud, business, audit, accountingUpon hearing the term “fraud,” companies like Enron and Worldcom typically come to mind. While it’s usually these large, complex cases that get the public’s attention, the truth is that numerous forms of fraud can run rampant in any type of organization. In fact, a study by the Association of Certified Fraud Examiners (ACFE) reported that small businesses are by far the most common victims of fraud. Businesses are constantly changing, so it’s important to continually review one’s internal controls to minimize the risk of fraud occurring. Here’s an overview of some important considerations when re-evaluating internal controls.

Segregation of duties

Key processes within the organization should be systematically divided between multiple employees to lessen the likelihood that one worker alone can execute a fraudulent act. For example, when a payment is being made, a company may have different employees authorize the payment, post the disbursement to the general ledger and sign the check/release the wire transfer. Additionally, electronic access safeguards should be in place; for example, access to the accounting and payroll software needs to be monitored and restricted to only pertinent employees.

It’s also important to note that, while duties should be adequately segregated across employees, all processes should have a “back-up” employee who is able to perform them. In fact, mandatory vacations for employees is a common tool to deter and detect fraud, as it prevents one employee from having absolute control over a process. It can sometimes be easy for the “segregation of duties” internal control to become outdated due to employee turnover and other changes within the organization.

Management oversight

Many small businesses struggle with proper segregation of duties because they simply don’t have enough personnel to ideally divide the processes between. One of the best mitigating factors for this situation is to have proper and thorough management oversight over the accounting processes. Management should be consistently reviewing key reports, reconciliations and procedures being performed. Sensitive areas like the cash accounts and payroll should be routinely reviewed by a supervisor that is not involved in the areas’ day-to-day recordkeeping, and significant transactions should require supervisor approval. Not only will this oversight help catch any potential errors or fraudulent transactions, but the presence of management oversight helps deter fraudulent behavior from happening in the first place.

Positive tone at the top

The “tone at the top” is a term used to describe a company’s general ethical climate, implemented and influenced by management’s actions. It is vital that management leads by example and fosters an honest, ethical culture within the organization. This concept extends to all employees being on the same page as management and buying in to the corporate identity. Simply having a positive work environment has been proven to help prevent employee theft and fraud.

Fraud is a risk that all businesses have to continually address. While it’s impossible to prevent or detect all instances of fraud, ensuring that proper preventative measures are in place can go a long way.

Brad Sinko, CPA