Specific steps to take to fraud-proof your business or organization:
The most pressing issue for a small business or organization is lack of resources. Money is tight, and you don’t have enough hours in the day to take care of everything there is to do. That should not mean you let down your guard and allow internal control weaknesses to threaten your business or organization.
The number one internal control to pay attention to is segregation of duties. That means that no one person has control over all aspects of a transaction. Primarily, this pertains to the financial aspects of the business, but it can also mean that you have a second set of eyes to check key transactions such as taking an order, double checking the quantity, address, price, shipping address, credit card information, inventory stock, etc.
First of all, to err is human. EVERYONE makes mistakes. Your goal should be to design a process where mistakes are minimized. Split up the work. Rotate staff. You not only get improved segregation of duties internal controls, you get cross training, and the opportunity to provide a more interesting work environment for your staff.
At every bank, officers and tellers are REQUIRED to take at least 2 consecutive weeks of vacation every year. The primary reason is so any fraud that has been occurring can have a chance of coming to light when the perpetrator is not there to cover his/her tracks. One huge red flag of fraud for any business is the uber-dedicated employee who is never sick and never takes a day off. Just on the face of those facts, I would bet $100 every time ……that the person is covering up some manner of fraud. Occasionally, I’d lose the bet. But more often, I would win.
So……..your business or organization only has resources for one bookkeeper. What can you do? Let’s think…….
At the very minimum, you MUST have the bank statements sent directly from the bank to someone OTHER THAN THE BOOKKEEPER! They should be sent to the President/owner/Executive Director. Or their spouse. Or to the Treasurer. Or to your accountant. Find somebody!
The key to this control is that the person who receives the bank statements has to OPEN THEM and LOOK AT THEM! If I had a nickel for every business that has the statements sent to the owner, who then has no time for them and just hands them, unopened, to the bookkeeper, I’d be typing this from my cabana in the Bahamas.
- Look at the cancelled checks.
- Look at the signatures.
- Look at the vendors.
- Look for direct debits.
- Look for bank fees.
- Look at the deposits.
Checklist for examining the monthly bank statement:
Look at the cancelled checks.
Are there missing check numbers?
At the beginning of the month, you should see the outstanding checks from the prior month clearing. There may be some irregularity in the numbers.
At the end of the month, there should be some irregularity in the numbers because of outstanding checks.
Do you print your checks on a printer? Are there any handwritten checks? That would be unusual.
Look at the signatures.
In many small business fraud cases, the bookkeeper forges one or more signatures on regular and payroll checks. Try this test. Go ahead and sign any check as “Mighty Mouse.” See if the bank processes it. I bet they do.
Look at the vendors.
In many fraud cases, the bookkeeper sets up a phony vendor and then issues checks to her phony vendor business. Make sure you recognize every vendor name. I have yet to meet a small business owner who could not spot a phony vendor name. But you have to LOOK.
Look for direct debits.
Many frauds involve the bookkeeper making wire transfers or other direct debit transactions. Make sure any you see look reasonable and familiar.
Look for bank fees.
Often a fraud will involve an unusual transaction and will trigger an unusual bank fee. Also, fraud will also cause the bank balance to be dangerously low, triggering insufficient funds charges. A dishonest bookkeeper will try to cover those up in the accounting records.
Look at the deposits.
Do you make deposits every day? Are they all there? Do the amounts look right? Is the total for the month what you expect?
After a few months, this cursory kind of review ought to take only a few minutes – about 10 minutes a month. Isn’t that pretty inexpensive insurance against financial fraud?
How does that all sound so far? Think you’re done? Think you’re covered? Well, have you got any credit card accounts? Well……DO YOU?
At the very minimum, you MUST have the credit card statements sent directly from the bank to someone OTHER THAN THE BOOKKEEPER! The drill is similar for credit card statements.
- Look at the vendors and amounts.
- Look for bank fees – late charges and over-limit fees. Any foreign currency transactions?
- Look at the payments.
The person reviewing the credit card activity every month should recognize, to some extent, every transaction and fee. If there is anything that is not familiar, ASK QUESTIONS. The simple fact that someone other than the bookkeeper has a regular and direct interest in and access to the financial transactions is enough, in my opinion, to deter at least 80% of fraud and embezzlement.
I have only a few final words. There are many other important internal controls covering many other aspects of any business. Consider inventory controls, accounts receivable controls, payroll controls, cash receipts and cashier controls, and on and on. However, if you have to start somewhere, and are looking for the most cost effective controls, I believe these I’ve described today are them. Plus……
At least once a year, order a credit report on your own business. In some frauds, the thief opens loans in the business’s name, or other accounts, and absconds with the proceeds. A credit report is one place you may catch these.
Run a criminal background check on your bookkeeper. Just do it. Wait…..is the bookkeeper a family member? Let me tell you the story of a client who owned a convenience store. Her sister was an employee. What a good sister she was, too. She was always amazingly generous with presents at Christmas and birthdays. Oh…..guess where the money was coming from. Yes, she was stealing from her sister’s convenience store.
Run a credit report on your bookkeeper. If they balk or refuse, consider hiring a new bookkeeper and make the credit check part of the job requirements. See the sister story above!
If you are a board member, run a credit check and criminal background check on your Executive Director. Just do it.
If I had small business clients, and if they agreed to adopt these controls, I would provide a guarantee that I would refund the prior 12 months of accounting and tax preparation fees if the business was ever a victim of fraud by the bookkeeper. I am not kidding.