There are as many ways to defraud a business as there are individuals to dream up scams. Your accounting function — payroll and accounts payable and receivable — is particularly vulnerable. To protect your business from financial losses and possible public embarrassment, implement and enforce these five basic controls:
1. Screen employees. Require all prospective employees, regardless of level, to complete an employment application with written authorization permitting your firm to verify all information provided. Then, call references and former employers and conduct background checks (or hire a service to do it for you). These checks search criminal and court records, pull applicants’ credit reports and driving records, and verify their Social Security numbers.
2. Use fraud-proof documents. The design of financial documents can ensure proper authorization of transactions, completeness of transaction histories and adherence to other control elements. For example, use prenumbered payment vouchers on which a designated partner indicates approval for processing disbursements.
3. Require authorization. Authorization procedures can prevent transactions from occurring without proper approval. In the example above, the designated partner is the authorizing party. This control is effective because the designated partner is in a position to know what the transactions are and how they pertain to the firm’s clients. Similarly, be sure to restrict access by maintaining current signature cards at your bank and protecting accounting and billing system access with difficult passwords that are frequently changed.
4. Segregate duties. Proper segregation prevents people who are in a position to perpetrate fraud from doing so. Often, smaller firms make the same person responsible for opening mail, making bank deposits, recording book entries and reconciling monthly bank statements. In this environment, fraud is not only possible — it becomes likely. One of the simplest ways to prevent criminal activity is to distribute these tasks to two or more people.
5. Provide independent oversight. Although your accounting department should maintain control of your accounting function, independent oversight is necessary. For example, a designated partner should open bank statements. Even if he or she doesn’t review all items individually, this reminds employees that transactions are verified. Someone outside the accounting department, such as your firm’s CPA, should also review transactions as they are processed and financial statements at the close of the accounting cycle reconciliations.
A strong defense
In a lax environment, otherwise honest and trusted employees can be tempted to steal. So even if your employees are like family — especially if your employees are like family — you need to reduce fraud opportunities. This means updating and enforcing internal controls. If you aren’t sure if your policies are adequate, or if you’ve experienced a fraud incident recently, talk with your financial advisor for advice on strengthening your defenses.[/fusion_builder_column][/fusion_builder_row][/fusion_builder_container]