Protect yourself, business against financial theft

Fraud happens more often than you think. Put these controls into place to safeguard your business.

Fraud is everywhere, as thousands of businesses, nonprofits and government programs have learned the hard way.

Organizations lose 5% of their revenue to fraud each year, according to a 2020 global study of occupational fraud and abuse by the Association of Certified Fraud Examiners. The typical fraud case lasts 14 months before detection and causes a loss of $8,300 per month. And small businesses are more likely than large ones to experience these three fraud risks: billing, payroll and check and payment tampering.

Most fraud occurs through employees who steal funds and other resources from their employers. But owners, executives and even family members can also be perpetrators.

Guarding against fraud, or asset misappropriation, is your responsibility as a business owner. Here are a few controls to limit the opportunities for fraud and help safeguard your business:

• Secure your organization. Control who reviews sensitive documents. Insist that good audit trails be created for all transactions. Perform independent reviews and additional audits. Require back-up documentation.

• Keep a close eye on cash. Have bank statements mailed to your home, where you can open and review them yourself.

• Reconcile your bank accounts every month. Work with someone other than the person who handles your deposits.

• Watch your margins and key numbers. If they’re higher or lower than they should be, find out why.

• Look for red flags in payroll. Payroll fraud usually occurs when an employee makes false claims for compensation, causing an employer to issue payment or overpayment. This can appear as “ghost employees,” inflated commissions or falsified timesheet hours. Salaries are more challenging to manipulate, but both salary and hourly amounts have been altered before. Submitting fraudulent expense reimbursement requests is another area of fraud often related to the payroll function.

• Avoid having your accounts receivable payments sent to a general company address that many people can access. Instead, use a separate post-office box or lockbox.

• Never pre-sign checks. Signing blank checks for future use can leave your business vulnerable to theft. If you can’t be available to sign checks yourself, consider other ways for employees to pay expenses, such as a company credit card.

• Periodically review your business’ master client or vendor list for potential fake customers. Phony accounts are a common way employees steal from a business.

• Segregate financial duties. For example, the person who makes and records deposits should not be the one who records the dispersal of checks. Granted, when you have a limited number of office staff, it can be hard to segregate duties. Consider an alternative strategy, such as occasionally rotating responsibilities. That not only helps prevent and detect fraud but also benefits your business with cross training. That can bolster back-up capacity for the times when someone is out of the office.

• Make sure equipment or software purchases are in your business’ name.

• Check references for employees and independent contractors. That includes drug testing, criminal background checks and credit checks.

• Management should approve all overtime before employees do the extra work.

• Watch employee behavior. One possible signal of fraud is the employee who seems to be clearly living beyond his or her means—expensive clothes, vehicles or travel. Further, managers often have noted in hindsight that those involved in fraud were experiencing significant personal or financial stresses that may have played a role in triggering the wrongdoing.

• Change passwords to stop ex-employees from being able to access sites or documents.

• Allow your employees only limited access to accounting records and personal information.

• Don’t become complacent. Most employers don’t believe any of their workers would view or steal confidential information. Unfortunately, embezzlers and other fraud perpetrators can be anyone—long-time and new employees, owners, managers, people with and without criminal backgrounds.

• Encourage whistleblowers. Fraud is more likely to be detected by a “whistle blower” or tip than by any other method. Let your employees know they can report suspicious activity without fear of reprisal.

Work with a financial expert if you need help in detecting signs of fraud, setting up controls or establishing other fraud-detecting protocols. Fraud occurs more often than you think. Stay vigilant.

Editor’s note: Maxson Irsik, a certified public accountant, advises owners of professionally managed agribusinesses and family-owned ranches on ways to achieve their goals. Whether an owner’s goal is to expand and grow the business, discover and leverage core competencies, or protect the current owners’ legacy through careful structuring and estate planning, Max applies his experience working on and running his own family’s farm to find innovative ways to make it a reality. Contact him at [email protected].