14 Steps for Preventing Fraud1
In a small business, owners and employees often think of each other as family, and can't imagine someone in the “family” willfully committing a crime against the firm. In fact, facing up to the possibility of fraud is one of the toughest concepts that small business owners have to face. But it does happen. A lot.
Not always, but often, employees caught committing fraud are the ones least suspected. They work long hours and weekends because it takes extra work to run a successful fraud. They may even skip taking holidays and vacations because a replacement might discover that something is amiss.
One of the best ways to safeguard your business is to instill security measures from the beginning. If you haven't already done so, start immediately. To do this without alienating employees, keep the rules from becoming personal. Explain that you are instituting small business guidelines recommended by the SBA (Small Business Association) and the federal government, and that the rules are there to protect everyone. Then stick to the rules with no exceptions, including yourself.
¹Based on Dirty Deeds, by Mel Duvall, and published in Pitney Bowes Magazine, Jan/Feb. 2003.
14 Basic Fraud Prevention Guidelines
- Check the references of every prospective employee.
- Every charge, or bill, has to have a purchase order signed by the person authorizing the purchase.
- Set a limit to the number of people who can authorize purchases
- Set a dollar limit to the amount each person can authorize.
- Personally keep control over blank checks.
- Use sequentially numbered checks and review the checks periodically to make certain no numbers are missing.
- Only you or a specifically authorized person can sign checks.
- Have bank statements sent to you at a different address than the office so you can review the statement before anyone else does.
- If payment is being made to an unfamiliar vendor, contact the vendor and verify the purchase.
- The person who keeps the books should not be the person who reconciles the statements.
- The person who opens the mail and prepares deposit tickets should not be the person who keeps the books.
- Conduct surprise audits of petty cash.
- Conduct surprise audits of the payroll register. Check for the accuracy of hourly rates and hours worked. Make certain there are no fictitious employees.
- If an employee does commit a fraud, press charges.
Why go to this bother? You might be able to recover stolen money or merchandise over time, but the trust you once had for your employees will be gone forever.
Remember—fraud costs small businesses thousands of dollars yearly.
Taking these simple precautions can help safeguard your small business.
The 5 Most Common Types of Fraud
Skimming A clerk makes a sale but fails to record the sale and pockets the cash.
Fraudulent Disbursements Payments are made against phony invoices.
Checkbook Fraud One employee has control of the company checkbook and there are no safeguards in place.
Payroll Fraud Filing for fake overtime, or for fake employees.
Inventory Fraud It doesn't matter whether the items are small or large—pens and paper or merchandise and machinery parts—inventory disappears.