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No one immune to fraud, so how safe is your business?

Are you a victim of fraud? Most business owners believe they are immune or do not consider fraud to be a significant problem. However, various studies, such as the 2004 Association of Certified Fraud Examiners (ACFE) study showing that the typical business loses 6% of its revenue to fraud and abuse, indicate a high likelihood that fraud does exist in your business. Just how much are you losing, and where is it going?

Could you be paying for parts that your service manager uses in his side business? Does your salesman inflate his travel and entertainment reimbursements? Is it possible that an unsupervised worker inflates production reports to increase his bonus? Has your accounts payable clerk set up a phony vendor to divert your money to his personal bank account? These are common, yet unsophisticated, schemes used to rob business owners of their profits.

Think again

If you’re thinking “my employees wouldn’t do this to me,” think again. It is this attitude that makes you vulnerable. Human nature is to trust. By trusting your employees you expose your business to fraud risks. A good system of internal controls is necessary, even if you have no reasons to doubt the integrity of your employees.

Many fraud perpetrators start out as good employees. As time goes on, they may be put into a situation that leads them down the path of fraud and deceit. Do you have employees with children in college, aging parents, an unemployed spouse or health problems? The stress of dealing with everyday financial pressures can cause a good employee to seek money illegally from accessible sources — your bank account or assets.

If an employee is faced with a decision to file for bankruptcy, with the stress and embarrassment that follows, or instead to forge your signature on a company check, take money from the cash drawer or pad a paycheck, which course of action will they take?

Many employees rationalize their actions by saying they are only borrowing the money, or that everyone else is doing it, or the boss does not pay what they are worth. If there is personal financial pressure, an opportunity to steal, and a rationalization that they really are not doing anything wrong, fraud usually will occur.

As a business owner you typically cannot alleviate the personal financial pressure, but you can put up road blocks to limit rationalization and the workplace opportunity. Here are a few suggestions that do not cost a lot of money, but can have a huge impact on reducing your vulnerability to fraud losses:

• Segregate duties. If you do not have the resources to hire an adequate number of employees, at least have your bank statement sent to your home. Open and review it closely. Question any unusual transactions, payees or amounts.

• Closely review the supporting documentation before signing checks. Ask questions.

• Review the annual W-2 forms generated for your employees. Look for names you do not remember, excessive wages and recurring addresses.

• Become involved in the financial reporting process. Regularly review the financial reports generated by your accounting staff. If you don’t understand the reports, consult with your accountant, banker or financial advisor.

• Gain an understanding of your computer operations. Ask to review edit and exception reports generated by your software that may identify concealment of fraudulent activity.

• Set a proper example. Don’t expect your employees to have high ethical standards if they see you using company assets for personal use, taking excess paid time off, under reporting revenue or taking money from the cash drawer.

• Provide good working conditions. An employee that is treated with respect will have a harder time rationalizing their fraudulent actions.

By taking an active part in preventing fraud you can minimize your fraud losses and retain more of your hard earned revenue for capital improvements and expansion, pay increase and bonuses.

Donna M. Ingram, CPA, CFE, Cr.FA, is a partner in the firm of May & Company, LLP, which has offices in Mississippi, Louisiana and Alabama. She can be by e-mail at dingram@maycpa.com.

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