Accounting, Tax, IRS & Marijuana

Forensic Accounting Services - Preventing & Detecting Fraud

No small business likes to think that their trusted employees would steal from the business – certainly not their friends and family members. Unfortunately, small businesses aren't exempt from fraud, and assuming that your company is safe from embezzlement, malfeasance, or any other fraudulent act can put your business at grave risk. Here are some common misconceptions regarding small business fraud:

Fraud Doesn't Happen in Small Businesses. Any business is vulnerable to fraud. Trust cannot be your internal control. Your company becomes even more vulnerable if you ignore any potential threats and fail to take the necessary steps to protect your assets.

All Of My Employees Are Trustworthy, They Would Never Think About Stealing From Me. Unfortunately, research shows that long-term employees are the most-likely to commit fraudulent acts. 

We Have Internal Controls, So Our Company Is Safe. Internal controls are essential, yes, but not sufficient. If internal controls are not properly designed or enforced, or not updated based on changes in your small business, you could be putting your company at risk. They also need to be supported with a top-down culture of ethics (Tone At The Top) and an adequate amount of managing risk.

I Will Sense When Fraud Is Occurring. The data shows that the average occupational fraud scheme lasts 18 months before it is detected. If you’re not staying on top of your company’s financial data and there are weak (or no) internal controls, fraud can be happening right under your nose.

Preventing Fraud in the Small Business

Now that we've dispelled several common myths, it is important to consider proactive measures you can take to prevent fraud in your small business. Here are some basic procedures and systems you can implement:

Develop a Proper Segregation of Duties. No one person should have control over an entire financial transaction from beginning to end. For example, the person who signs the checks should not be the person who has access to the check stock or be able to write the checks. When one person has total control over the whole financial process, there are no 'checks and balances', and fraud can easily be committed.

Make Vacation Mandatory. This seemingly small step can go a long way towards preventing and identifying fraudulent activity. When another person steps in to take over a process or task, they may be able to uncover red flags pointing to suspicious activity.

Regularly Review Your Financials. Staying on top of the financial condition of your company will help you identify any suspicious transactions or payments. Set aside time each month to review bank reconciliations and the checking account.

Conduct Internal Audits. To make sure your internal control system is sufficient and working as designed, conduct internal audits and test your procedures. Ensure proper implementation, and also adapt internal control design as needed to protect key areas of your business, including finances, technology, and intellectual property.

Trust is essential in any business, and it is one of the traits that helps make small businesses so resilient. However, that trust cannot be blind. Fraud prevention mechanisms are important for any business, regardless of the mission, longevity, or family and friend ties.