Keeping Their Hands Out of Your Cookie Jar

 A small business owner’s guide to preventing accounting fraud.

Fraud or Accounting discrepancies seem to have plagued the daily news. Multi billion dollar companies, subject to extensive audit, are now reporting “accounting irregularities” that have cost billions of dollars. Although most companies won’t see fraud of this magnitude, many business owners are wondering what they can do to protect themselves from accounting fraud in their own business.

 Small business owners can be victims of bookkeeping fraud even if they have only a few employees. Busy running the business, owners often want to turn over all aspects of the bookkeeping to a trusted employee. Many times this won’t lead to embezzlement, but could your company afford it if your employees made off with a few thousand dollars?

 In accounting there is a concept called “internal control.” Internal control exists to separate the duties of the person who controls an asset from the person who is responsible for the bookkeeping of that asset. This provides a system of checks and balances in accounting.

For example: The person who writes the checks is not the person who reconciles the bank account. In smaller businesses, it’s not always feasible to separate duties to provide maximum internal control; however, there are some steps small business owners can take to minimize risk.

 The bank account is a primary target and if nobody’s paying attention, an easy one. Many times a bookkeeper will have easy access to a bank account because they have sensitive information and can convince a bank that their use of the account is legitimate. It is vital that all business owners or managers keep a close eye on the bank account. Listed are some suggestions on how to protect the bank accounts from any misappropriations.

Review all bank statements every month, before the statement is opened or reconciled by anyone else; Scan the canceled checks to make sure they are all valid; Review the check numbers to look for out of sequence checks; Finally, pay close attention to debit card transactions and immediately investigate all suspicious transactions.

1. Maintain signature authority on all bank accounts and do not pre sign checks. Never allow signature authority for a bookkeeper or other employee who has check writing privileges.
2. If there is an ATM or debit card for the account (which is highly discouraged), never give out the PIN number and never choose a PIN number that is obvious (Like a child’s birthday.)
3. Keep all checks locked up when not in use. Keep all voided checks and clearly mark them “VOID”.
4. For online banking, do not keep the password on the computer and do not tell anyone the password.

 According to the Association of Certified Fraud Examiners annual report, “The most common method for detecting occupational fraud is through tips from employees, customers, vendors and anonymous sources. The second most common method of discovery is by accident.” This means that business managers have to be even more diligent. For example, an employee’s lack of desire to take a vacation may seem like dedication, but actually may be an attempt at hiding something. If an employee tends to get very defensive or possessive about the books, it is time to enforce mandatory vacations. Then, a comprehensive bookkeeping review should be performed.

 A final word of advice, keep those books in good shape. When the bookkeeping is a mess, it creates a perfect breeding ground for fraud. A bank account that has not been reconciled in months (or years!) can easily mask severe problems. Keeping the bookkeeping and taxes up to date is vital not only to prevent fraud, but to help the business owner make better business decisions as well.

Unfortunately, internal forces are not the only ones at work. Phony invoices submitted to companies are a growing epidemic. This is true, partially because of the ease with which they are paid. According the Council of Better Business Bureaus some of the most aggressive scams against businesses include: 

1. Bogus billing for yellow page advertising
2. Fake directories
3. Fraudulent telemarketing offers for office supplies
4. Fundraising appeals from questionable charities

A survey conducted by the Yellow Pages Publishers Association revealed that 9 out of 10 individuals responsible for paying bills have other major responsibilities. This may explain why “bogus” bills for goods and services end up being paid unintentionally. 

The study also found that nearly 4 out of 10 companies do not require a second approval before bills are paid. This practice makes it easier for fake invoices to pass through many companies without detection. Requiring proof of delivery, using purchase orders, and implementing a tiered approval process are all ways of reducing the likelihood of falling victim to these schemes. These controls also make sure bills are not overpaid or paid twice.

Although not all fraud is completely preventable, diligence is the strongest defense. Proper oversight, strong internal controls and a well-trained staff are all significant ways to avoid “accounting irregularities” in your company.