The current economic downturn has created tremendous financial pressure for Americans. Many companies have identified an increase in occupational fraud since the economy weakened. It is no wonder morale is down in an environment of layoffs, salary reductions and cutbacks, combined with housing value declines and increased living costs. Personal hardships often create the pressure, opportunity and rationalization to commit fraud.
Business owners must recognize potential fraud practices and how to minimize their occurrence. Employee embezzlement accounts for the greatest frequency of fraud crimes according to a survey conducted by the Association of Certified Fraud Examiners (ACFE). Frauds by vendors as well as by unrelated parties have also increased during the current economic slump. The median loss caused by occupational fraud cases was $140,000 – more than enough to sink a small business. A survey of CPAs conducted by the American Institute of Certified Public Accountants (AICPA) identified the most commonly reported fraud issues were false payment requests, check and credit card fraud, and overstatements of accounts receivable, inventory or other assets.
Cost-effective measures
Protecting company assets from potential fraudsters needs to be a top priority. Unfortunately, businesses with fewer than 100 employees often lacked formal controls. It will usually be by accident that fraud will be detected.
Owners must weigh the costs of adopting better controls vs. the financial consequences of occupational fraud. An initial plan does not have to be expensive. These are some simple steps a company can adopt as part of a fraud-prevention program:
- Establish an employee code of conduct. It will set the bar for ethical standards. Educate and give clear guidance on expected behaviors and consequences.
- Perform background checks before making a decision to hire.
- Keep your blank check stock in a secure location.
- Perform regular reconciliations of all bank and credit card accounts. Notify financial institutions immediately of unauthorized checks and other transactions.
- Set up direct deposit for payroll.
- Create a separation of duties whenever possible.
- Initiate a job rotation policy. Requiring employees to regularly switch duties allows co-workers to identify errors or unethical behavior.
- Mandate a vacation policy. Employees will be away long enough for another co-worker to see how a job was performed and possibly detect irregularities.
- Set up an anonymous alert box or communication system so employees can convey suspected activity without fear.
- Use bonded external providers for functions such as janitorial or security services.
- Implement security for your computers, network, vendor/customer databases and all other data.
Business owners tend to rely on “trusted” employees and vendors to keep their company going. While skilled in their given profession or industry, owners often lack the accounting expertise to identify red flags of fraud. Gary Kaplan can help you identify existing frauds and implement controls that reduce the risk of happening in the future. Speak with Gary about protecting your business and assets today.
