Financial Controls to Help Protect Your Business From Fraud

Theft, fraud, and embezzlement are always concerns of any business owner. These may be expenses you don’t know you have. Hopefully not!

What is known as the fraud triangle is a model that explains the three behavioral traits necessary for the occurrence of occupational theft. These characteristics are: (1) Need; (2) Opportunity and (3) Rationale. If you can block any one of the three traits then you may have saved the day.

Over the years I have seen numerous instances of stolen cash and other assets. I always tell business owners that problems may very well arise from an employee that you suspect the least.  I would love to tell you these thefts were very complicated, sophisticated schemes. They were not. Internal controls were simply lacking. How were these thefts discovered? No real detective work was involved – typically, the culprit was just careless such as bouncing a check to a vendor that company did use and the owner being called for payment. Perhaps in these cases, the owners were too trusting, not that trust is a bad thing – but, owners must inspect what they expect. Most internal controls revolve around separation of duties. That is all well and fine, but too often in a small business, your accounting department may consist of only one or two employees. With a limited number of staff a full separation of accounting duties is simply not always feasible.  When limited staff is the case, the owners must share a greater role in internal controls or employ someone else for that responsibility. I often wonder how much fraud goes on, unnoticed - where the culprits are never brought to justice.

Here are 17 financial controls that may help safeguard your business. 

1.    If the owner is not vigilant about reviewing the online banking activity then the bank statements should be mailed to their home. The business owner should open and review these bank statements. Whether online or with your bank statements mailed – review cleared checks for the payees, amounts and endorsements on back of the check. AND, be sure your staff is aware that you are doing this by questioning transactions from time to time. This over watch is a great deterrent if nothing else.  

2.    Preferably, someone other than the person making deposits should prepare monthly bank reconciliations.

3.    Use a separate post-office box for accounts receivable payments instead of having the funds come directly to your office.

4.    Consider the bank automatically sweeping excess funds from the main operating business account into another account that is controlled only by the owner.  

5.    No one should pre-sign blank checks and only the owner should sign checks. Period.  There are better ways for expenses to be paid if you are out of town. Examples include company credit cards, two party "ACH" systems from your bank, or a two party check system with clear limits on the available cash held in that account.

6.    Any accounts receivable write-offs should be approved in writing by the owner or management.

7.    Use pre-numbered invoices and maintain an invoice log. Same system for checks.

8.    Aged accounts receivable reports should be reviewed weekly by the owner or management.

9.    Customer lists should be regularly reviewed by the owner and management for potential fake customers. Same system for your vendors’ lists – check for fictitious names.  

10.    Look for other ways to confirm your sales/cash receipts. For example, compare the percent of your sales on account versus the amount of cash received and/or your gross profit margins and other key metrics. If any of these numbers are off – investigate.

11.    Purchase invoices should be approved and reconciled with purchase orders by the owner or management.

12.    Control company credit cards.  Review. Require receipts and invoices. Have an expensing policy which explains what expenses are allowed and their appropriate authorizations. Staff should sign off on their expense reports as to their truth and accuracy.  

13.    Have "bidding and estimating" procedures that minimize risks of bribes, kickbacks, or other illegal collusion.

14.    Be certain any software or other purchase that the company pays for be owned and titled in the company name. This includes checking that the company is the one named with the software vendor or other supplier.

15.    Thoroughly check staff and contractors before you hire them. Consider criminal background checks, drug testing, and credit checks.

16.    Check with your insurance agent. Consider bonding staff or getting other appropriate insurance coverages. Typically, this coverage is not terribly expensive.

17.    All overtime should be approved by management prior to it being worked.

Credit for ideas and concepts to David Finkel of PUBLISHED ON: MAR 2, 2017

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. We may be reached in Dayton at 937-436-3133 and in Xenia at 937-372-3504. Or visit our website.

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