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Best Practices: Internal Fraud

Best practices on securing business against internal fraud.

Small and mid-sized companies are more likely to experience fraud than larger organizations, and the damage from fraud on these companies can be much more impactful. The majority of this fraudulent activity involves theft, or misappropriation of assets.

Employees are typically the ones who commit these thefts either directly by stealing cash or claiming false expenses or stealing company property (even in small amounts, like pens and office supplies). Many small business owners find this tough to accept, because they often consider their employees as their friends and even members of their extended work family. 

Other main types of fraud involve financial statement reporting and general corruption, like kickbacks schemes that take advantage of the employees.

Consequently, it is crucial that small businesses take steps to prevent fraud, or at least catch it before it does too much damage.

Here are our top 6 suggestions on best practices for securing your SMB against internal fraud or delayed deposits: 

1. Separate accounting responsibilities.

Due to the lack of resources or need for efficiency, small businesses usually have a one-person accounting department. This person probably manages the day-to-day bookkeeping functions such as client receivables, processing payments, paying invoices, managing cashier's checks, and records those functions in their accounting system. Businesses should handle these functions interchangeably, keep the handling of cash and accounting functions totally separated, or have these functions performed by an accounting firm.

2. Knowledge of employees/colleagues.  

Even at a small business, there is no doubt having a formal hiring procedure can help prevent fraud. Employees handling cash or managing bank accounts should all undergo background checks. Employees handling finances are scrutinized more carefully as they start to handle more financial duties.

3. Establish and maintain internal controls.

Even small businesses can benefit from creating and maintaining internal controls to prevent or detect fraud. For example, limiting access to financial account data, inventory access, establishing multi-party signoffs on transactions, overtime, all payroll functions, or other accounting or payroll functions. Audits should be performed regularly to ensure the integrity of the books.

4. Audit the books and examine business bank accounts.

Businesses should regularly monitor areas of cash handling, refunds, product returns, inventory management, and accounting functions. Additionally, a non-scheduled audit is also useful to help detect fraud in high-risk, critical business areas. 

Online banking gives you the option to view account activity and statements whenever you want, and your business management should do so frequently in order to ensure that paper statements in the office haven't been altered. A few things to look for include out-of-order or missing checks, unidentified payment recipients, and checks that are signed over to a third party instead of deposited in a business account. Making staff aware that checks are reviewed as part of the accounting review process can help prevent fraud.

5. Training for prevention of fraud.  

Employees in fraud-prone areas of the company must know the warning signs, how to prevent fraud, and what to report if they notice unusual behavior or actions by employees or customers. Setting up an anonymous system can also reassure them when it comes to letting their boss know about a fellow employee. It is imperative that the management, including owners of small businesses, develops an ethics code that makes clear that unethical behavior will not be tolerated.

6. Get help from an expert.  

If fraud prevention measures have been implemented by a business and the numbers still don’t add up, then it may be wise to hire a professional accountant to conduct an audit and review of the business’s accounts and processes. CPAs and Certified Fraud Examiners can offer a lot of assistance in fraud detection and prosecution, if needed.

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And there you have it, our top 6 recommendations for securing your business against internal fraud.

While it may seem like some of these measures are extreme in nature, remember that accounts of fraud will harm and affect SMBs to a greater degree than some larger companies, as it will be more difficult to “bounce back”. 

You may feel as though your team members and employees are trustworthy and “like family”. In many cases, they will be family, but this cannot deter you from implementing best practices against internal fraud to help protect your livelihood.To learn about how these and other Best Practices can affect your business and your clients – talk to our team for further details.

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