By their very nature, small businesses are always at risk of failure. Although issues such as poor cash management can cause their demise, theft is often the culprit.
Some crimes are simple: Customers pocket merchandise; workers skim the cash register; and former employees and competitors steal proprietary information to start or raid their businesses.
But the most dangerous form of internal theft involves embezzlement that siphons off capital over months, even years. Cash and funds go out the back door, and with them the vitals needed to keep operating. The Association of Certified Fraud Examiners’ “Report to the Nations on Occupational Fraud and Abuse: 2014 Global Fraud Survey” indicates that the typical organization loses 5 percent of revenues each year to fraud. The smallest organizations tend to suffer disproportionately large losses — and those same organizations are the most notably under-protected by anti-fraud controls, making them significantly vulnerable.
About a year ago, a credit union employee in Broward County was charged with stealing $20,000 from her employer over a three-year period. In 2012, a bookkeeper at a South Florida company was arrested on charges of diverting more than $181,000 to himself and a fictitious company.
According to the Association of Certified Fraud Examiners’ 2014 report, the median loss due to embezzlement was $130,000.
The forensic accountants are usually called upon too late — after fraud is discovered. However, forensic accountants should be utilized proactively to recommend and test the effectiveness of fraud prevention measures.
A strong accounting system can’t eliminate internal theft, but it can reduce its likelihood and reduce the amount stolen by discovering problems early on. Organizations that actively monitor and analyze data experienced losses 60 percent smaller and schemes 50 percent shorter in duration than organizations that did not implement data monitoring.
The sums justify an investment in accounting systems that can defend a company’s lifeline. However, although some controls require a significant investment and may not be feasible for many small businesses to implement, many controls can be enacted at a relatively low cost. Here are several ways your business can reduce the likelihood of internal theft:
Professionals tend to focus on their clients or patients, but they should also invest time in examining their finances. The owner or manager should review financial records daily. Do the payments received match that day’s bank deposit? Are all cash transactions accounted for? Are there security systems in place to ensure compliance with company policy? An accountant can help set up a system that eliminates gaps in tracing money flows.
Second, keep prying eyes away from financial records. Access to bank statements and deposit slips should be limited; secure the company checkbook in a locked drawer; restrict who can use the company checkbook, accounting system (such as QuickBooks) and credit cards.
Conduct background checks on job applicants who may handle company funds, including corporate credit cards. The company should hire an outside firm to search for crimes, civil actions and employment history and even education and certifications. Also remember the vast majority of occupational fraudsters are first-time offenders and most fraudsters work for their employers for years before beginning to steal. While background checks are useful, they cannot predict fraudulent behavior. Therefore, ongoing monitoring and an understanding of risk factors and warning signs are essential.
Fourth, put checks and balances into place by segregating duties. Don’t let one person handle all the money. Separate functions such as receiving payments and depositing them. Those same individuals should not pay bills. Set dollar limits for employees with spending authority. Job rotations and mandatory vacations are also effective.
Be proactive. Provide anti-fraud training to employees and ensure an effective fraud reporting mechanism is in place. Consider adding insurance for employee theft. This will not only assist in the recovery of losses, but also serve as a deterrent to employees aware of the policy, since insurance companies will often pursue the fraudster.
Last, the business owner or manager should sit down with an accountant regularly to review the company’s finances. In advance, the accountant can reconcile bank, deposit and payment statements. The review can uncover irregularities or see patterns that suggest that internal theft. If the business owner or an employee discovers an irregularity, such as an unfamiliar vendor, or suspects wrongdoing, hire a forensic accountant.