Today, I am going to start a series of articles about fraud. This series will not necessarily be on consecutive days. I will share with you some frauds that I have seen over the years (names will be changed to protect the innocent) and how these frauds could have been prevented.

Unfortunately, fraud is a fact of life in small business. To commit fraud a person must have an opportunity and must have obtained the trust of the owners or other overseers. I bet you will be surprised to know that most fraud is performed on employees that have been with the company for a long period of time. These employees have earned the trust of management and thus they have the opportunity to commit the fraud - and usually without any checks and balances to prevent it.

The culture of the organization is what tends to lead to fraud. If employees see that the ownership is conducting business in an unethical manner, than the employee tends to believe they can also act outside ethical means. For instance, the bookkeeper sees that the owner is paying for personal expenses and deducting them on their business taxes - an obvious violation of the federal tax laws - then they feel like they can "sneak" some of their personal expenses through the books.

Here is the list of the most common areas that fraud occurs by employees:

1. Company credit cards
2. Disbursements by checks
3. Petty cash expenditures
4. Payroll
5. Electronic payments - especially the use of PayPal
6. Invalid charges on company credit accounts

And we are not even talking about walking off with office supplies etc.

Obviously, segregation of duties is the best safeguard against fraud but a small company usually only has 1 bookkeeper so they have no way to really establish this safeguard.

Here are just a few common steps to help prevent fraud in a generic fashion (in future articles, I will talk about preventing fraud in specific ways):

1. The owner should OPEN the bank accounts and review the checks. If original checks are returned, they should scan the checks to make sure that all check payees are vendors of the company (ie no unusual checks are in there) and the owner should also keep a copy of the statement. If only copies of the checks are returned, then the owner should make a copy of the statement and checks and give the copy of the statement and the checks to the bookkeeper.
   
2. The owner should OPEN any charge accounts and credit cards and review the activity. Again, a copy of the statement should be retained.
   
3. Review the petty cash expenditures AND the frequency of the reimbursement of the petty cash fund. Further, verify the receipts attached to the reimbursement.
   
4. Do a surprise count of the petty cash and receipts and see if it reconciles.
   
5. Review credit card deposits and credits ESPECIALLY THE CREDITS and look for unusual activity.
   
6. Review the financial statements and make sure they make sense.
   
7. Forward your monthly financial statements to the CPA for a quick review.

This will not stop fraud - but it is a good start.

If you suspect fraud in an employee DO NOT APPROACH THE EMPLOYEE FIRST. You should get a CPA in and share your concerns with them. They can review your accounting records and usually very quickly determine if you have a problem.

I am an associate member of the Association of Certified Fraud Examiners; and can assist you if you believe you have a problem.