Internal Controls Are the Key to Preventing Small Business Fraud
Last week I read an interesting and valuable article about ways for small businesses to prevent fraud. I discuss the five steps recommended below, but first a bit of context.
Fraud takes place in small businesses at an alarming rate probably because of a lack of internal controls and overly trusting managers. The combination can be deadly when one employee is given too much authority to process certain transactions, for example, cash receipts and cash payments, bank deposits, and bank reconciliations. Responsibilities for managing cash should be divided so that there is a segregation of duties with checks and balances being part of an effective internal control system.
According to a 2010 report from the Association of Certified Fraud Examiners (ACFE), incidents of occupational fraud are 31 percent more likely to occur at small businesses as opposed to larger companies. To add insult to injury, as many as 40 percent of small businesses owners are embezzlement victims and a staggering one-third of all bankruptcies are the direct result of internal theft.
More alarmingly, a recent TD Bank Small Business survey found that although nearly three-quarters of American small business polled are incorporating some steps to protect their business, only one percent of respondents cite falling victim to fraud as a top business concern, even as cases of criminal fraud are on the rise.
Michael LaBella, Connecticut market president at TD Bank, provides five proactive steps you can take immediately to help prevent fraud:
• Manage finances using secure online banking. Banks and other financial institutions are at the forefront of developing and using security measures that help ensure financial information remains confidential and safe.
• Protect computer systems and practice online awareness. Being complacent about cyber protection can lead to the compromise of critical information and detrimental consequences for your business. Every computer at home and in the office should have installed and regularly updated firewalls and anti-virus software.
While conducting business online, be aware of “phishing” — an electronic scam that attempts to obtain confidential personal or financial information from its target. It takes the form of a fake message, usually an email, which appears to be from a financial institution or service provider. Never reply to any email or pop-up message that requests you to update or provide personal information.
• Safely handle sensitive documents and financial statements. The web isn’t the only place where thieves can steal valuable information. Some of your own employees and outside parties can steal important mail, credit card information or checks and commit fraud.
Printed financial statements, Social Security numbers and other sensitive papers should be disposed properly using a shredder or saved in a securely locked device. To avoid the hassle of handling several papers, banks allow customers to opt out of paper statements and receive online statements instead.
• Obtain fidelity insurance. Crime and fraud-related losses generally aren’t covered by property insurance policies. As a result, it’s important to protect money losses from workplace fraud.
Fidelity insurance protects your business against criminal acts such as robbery, embezzlement, forgery and credit card fraud. Liabilities secured under this type of insurance usually include money loss coverage (burglary or theft) and employee dishonesty (embezzlement and forgery).
According to the ACFE, 80 percent of workplace crime and abuse is performed by employees. Tough economic times often result in increased incidents of fraud and embezzlement.
• Incorporate appropriate checks and balances. Every small business owner should perform an internal review and assessment of company finances on a monthly basis. Make sure payment amounts match all invoices and check for any missing documents. Running random audits or having a third party audit your books once a year will show your employees you are serious about fraud and deter them from committing deceptive acts.
The most effective fraud prevention tactics are “non-accounting controls” such as hotlines and training and support programs for both employees and managers. The human factor also plays a significant role in the discovery of fraud. The most common method of catching a fraudster is a tip-off. In fact, tips expose fraud three times as often as do management reviews, internal audits, and account reconciliations, according to the ACFE.
If you think you’re a victim of business fraud, immediately contact the fraud department of any of the three major credit bureaus to place a fraud alert on your credit file.
Blog posted by Steven Mintz, aka Ethics Sage, on October 19, 2011