Fraud Prevention

It can happen to anyone, so it can happen to you: A trusted employee embezzling funds and committing fraud.  What can you do to make sure that you and your business are not victims of such a breach of trust? Of course, it always is a trusted employee – someone you did not trust would not have the opportunity to commit fraud. Being distrustful is not the solution either; the solution is to have controls and procedures to make sure that employees do not have the opportunity to commit fraud.
Like a governmental system of checks and balances the best way to prevent fraud is to segregate duties. Even a business with only one or two employees can have effective controls. For small businesses, internal controls are mostly common sense and paying attention, not elaborate procedures. There are many ways fraud can occur, but they can usually be combated by just a few procedures.
Minimize access to goods by giving keys and alarm codes to as few people as possible – ideally, just the owner has keys and codes. Change the codes often, and don’t use birthdays or other easily guessed combinations. Change your locks every year or two.

  • Take regular inventory counts, supervise the counts closely, and have any spoiled goods set aside for your inspection. Ideally, the counts should be done by someone other than the person who orders, ships or receives goods.
  • Any discounts or markdowns should be approved, preferably by you.
  • Make sure clerks actually ring everything into the till, and at the right price. Don’t allow clerks to void transactions without approval.
  • Have clerks count and total the cash in the till at the end of their shift, then have someone else like you or your bookkeeper re-count the cash and compare it to the till tape. If your bookkeeper makes up the bank deposit, check it to the till tape and take it to the bank yourself. Reconcile the bank yourself, and do it regularly.
  • If you have a receptionist or office clerk, have them open the mail and list all cheques with date, amount, and payer info. Occasionally check the date a cheque in the bank deposit actually came in – it should be listed as received after the last deposit.
  • Write all cheques yourself, and don’t give employees signing authority. Never sign cheques in blank, and verify the account and amount you are paying by looking at the invoice or statement.
  • Make sure employees take an annual vacation, and that their job is done by someone else while they are gone – many of the more sophisticated frauds can be uncovered by this simple step.
  • One of the most overlooked controls is to check references in detail when hiring new employees, and to run a credit report on applicants or when promoting. Statistically, employees with pressing debts or bad credit histories are more likely to commit fraud.

Research by Dr. Donald Cressey (Association of Certified Fraud Examiners) led him to develop a concept called the Fraud Triangle. Basically, he states that three elements are present in most frauds.

  1. An un-shareable financial problem – a pressing problem that can’t be solved by ordinary financial resources and that the employee can’t get help with.
  2. Access to funds – your funds.
  3. Rationalization – an excuse or reason for the fraud.

There are steps you can take to identify or stop all three legs of the fraud triangle.

  • Pay attention to your employees so you know when they have financial problems, and talk to them about their problems.
  • Use the controls we have been talking about to limit access to cash or goods. Encourage an atmosphere of honesty in the work place, to make it harder to rationalize theft, and to encourage other employees to report anything unusual.
  • Be fair and consistent in disciplining employees, and make sure employees know the consequences of committing fraud.

Finally, talk to your accountant. He or she can help you to design easy to follow controls for your business to reduce the chance of fraud, and help you to spot warning signs in the financial records.