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Fraud Prevention - Vital for Small, Private Businesses

By: Timothy P. Finerty, CPA

According to a recent report, the per-employee losses from fraud in the smallest businesses are 100 times greater than those at their largest counterparts. A big step to help prevent fraud in your business is to assure you have adequate internal controls in place.

Proper documentation and testing of internal controls, is one of the first procedures that private companies should consider. Testing internal controls can mitigate the risks from unexpected losses and threats to your company's reputation. Establishing an environment for internal controls is a multi-step process that includes input from key decision makers, such as the president, CFO and CEO. Essentially, internal controls are checks and balances that help prevent fraud, limit financial losses, and reduce errors or oversights by employees.

The most basic internal control concept is one that's referred to as "segregation of duties." It requires that different employees handle different financial and accounting tasks, thus limiting the potential for loss due to fraud or human error. Consider the following suggestions for segregating financial duties and strengthening your internal controls:

• Sign your own checks. Anyone who gets their hands on a signature stamp can use it to write and cash fraudulent checks. Before signing each check, review the invoice, delivery receipt, and purchase order


• Keep an eye out for slowdowns in accounts receivable processing and posting of customer payments. These may be indications of a fraud scheme known as "lapping of receivables" in which an employee pockets customer payments instead of depositing them


• Talk to your bank about Positive Pay services. This is an account reconciliation service that allows you to pay only those checks that are authorized, and it's one of the best ways to combat check fraud


• Have one person open the mail and list all the checks on the deposit slip while another enters cash receipts in your financial records


• Put someone who does not handle the checkbook or purchasing in charge of payments to suppliers or vendors


• Have your bank reconciliation done by someone who does not have access to daily checkbook transactions


• Take responsibility for approving all vendors yourself, and make sure there are procedures in place for counting all goods received and checking all orders to make sure they are accurate and of the quantity intended

Companies serious about documenting and testing their internal control procedures will engage their current accounting firm, or hire an outside accounting firm to evaluate their system of internal controls. Such a review typically includes such steps as:

• Documenting and assessing the effectiveness of the internal controls environment
• Identifying potential control gaps and making recommendations for improvement
• Documenting and tracking changes to key processes and controls
• Coordinating these efforts in a timely and effective manner with external auditors

To discuss your company's internal controls or whether an audit of your internal control systems is appropriate, please contact Tim Finerty at 248.208.8860.

248.208.8860 | 2000 Town Center, Suite 1800 | Southfield, MI 48075

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