Your Best Anti-Fraud Resources are Right Under Your Nose

Don’t think that because your CPA compiles or audits your business' financial statements, or does your taxes, that your business is protected or free from fraud.  All are valuable and necessary services but none are designed or intended to protect you from or detect fraud. The Association of Certified Fraud Examiner's 2016 Report to the Nations on Occupational Fraud (read executive summary here) found that in the US, only 4% of occupational frauds are discovered by an external financial statement audit.
The good news is that the best way to prevent and detect fraud is right under your nose: your internal resources. There are three easy, and relatively inexpensive steps to create an environment in a business that will discourage employees from stealing from you, or catch them early if they do. And all are less expensive than an annual financial statement audit.

Prevention: The ‘Tone at the Top’ 
“The tone at the top” is the attitude by board members, owners, executives, and management that they are running an ethical, compliant, law-abiding company that will always strive to do what is right and that all employees are expected to do the same.  Management should be expected to model that attitude without exception. This includes prosecuting employees who steal from the business and not hiding those consequences from the rest of the staff. This expectation is communicated to all employees, customers, vendors, applicants, and new employees. Employees sign contracts every year that they understand this expectation and pledge to not only abide by it but also report others who do not.

Prevention: Your Policies and Procedures  
Your policies and procedures make up your internal control system. Things like separation of duties, disbursement approvals, locking up blank check stock, among others, are not just good business practices -- they are key anti-fraud controls.  When you don’t have enough employees to properly separate duties, management must step in and provide more detailed review. Don’t rely on your bank teller to analyze check signatures or even know who the authorized signers are. It’s up to the business to make sure that unauthorized checks don’t get to a teller. There are many procedures that can be implemented to prevent, or mitigate the effects of occupational fraud. 

Detection: You, Your Employees, Your Vendors and Customers 
A tip is the most common notice of a suspected occupational fraud. The 2016 Report to the Nations  reported that in the U.S, 37% of all occupational frauds are caught as the result of a tip (51% of these from employees). Employees need to know how to recognize situations that are out of the ordinary. They should know why procedures are set up the way they are.  They should know that if they don’t follow established procedures, someone down the line will notice. The person printing checks is looking for management approval on an invoice, or the Controller is going to notice that accounts receivable is too high or that more refunds are being processed.  Employees should also have a way to report concerns anonymously and/or without fear of reprisal.  Larger organizations have hotlines monitored by an outside resource. Small businesses have suggestion boxes.  All businesses should have a published method for employees, vendors, and customers to report suspected wrong-doing.
Internal audits detect 14% of frauds.  An independent internal audit function is a requirement for public companies and a necessity for large businesses that are interested in receiving objective opinions about the effectiveness of their operating procedures and controls.  But a small company can either outsource periodic internal audits or allow an objective employee to perform limited reviews to make sure the checks and balances are working.
Bottom line: Ninety-three per cent of all occupational frauds in the US are caught internally. This is small fraction of the frauds that are prevented by a positive environment and a strong internal control system.

Ask me how you can prevent fraud in your business.