Smaller businesses tend to be more vulnerable to fraud than large companies. The recent economic pressures of inflation and a slowing economy are adding financial strain on families everywhere. Business owners need to keep in mind that personal financial pressures can push even the most trusted employees to commit fraud.

Reliance on routine CPA firm services to detect fraud is a mistake. CPAs cannot be relied on to detect fraud in the normal course of their services. The probability of NOT detecting a fraud scheme is much higher than for detecting an accounting error, as it may involve collusion, forgery, intentional omissions, misrepresentations or the override of internal controls. Detecting fraud requires specialized audit procedures like a surprise audit.

Catching an employee off-guard can be your best defense in discovering fraud. Consider making it a regular practice to conduct a surprise audit of your company’s financial records. This makes it difficult for a dishonest employee to cover up his or her actions.

In addition to uncovering fraud, the knowledge that the company conducts surprise audits can act as a deterrent. MeredithCPAs auditors can help assess your company’s risk profile and determine whether you need to dig deeper to evaluate whether and where fraud losses may have been incurred. 

6 More Ways to Prevent Fraud

  1. Hire Only Fully Screened Employees. Prevention is always better than a cure. Be sure to screen potential employees thoroughly, checking past employment, personal and professional references and criminal records. This is especially important if the person will handle cash, credit cards, inventory or disbursements. Consider getting a credit report.  

  2. Separate Accounting Duties. Many small businesses depend on one person to open mail, process payments, make bank deposits, pay invoices, handle petty cash and reconcile bank statements. This unrestricted access makes a business vulnerable. CPAs say it’s a good idea to divide accounting responsibilities so that no single individual controls all of the financial activity.

    If your business doesn’t have sufficient personnel to separate duties, you can try rotating financial responsibilities every few months. In any case, make it a priority to actively understand and verify your business’s financial information.

  3. Have Bank Statements Mailed to Your Home or a Post Office Box. Review bank statements before your bookkeeper does. Be on the lookout for missing checks, checks that are out of order, checks written to suppliers or people you don’t know and checks made out to a third party but endorsed by someone in your company.

  4. Create an Ethical Work Environment and a No-Tolerance Culture. Set appropriate ethical examples for employees to follow and treat workers fairly and with respect. But don’t be too trusting — keep in mind that personal financial pressures can push even the most trusted employees to conduct fraud.

    Through employee orientation, training, and other communications, make every employee aware of what activities constitute fraud, what steps the business takes to detect fraud.

    You should also let employees know what to do if they suspect fraud. Because most employees are reluctant to report suspicious activity, a third-party hotline can offer a level of anonymity that makes employees more willing to come forward.

  5. Insist That All Employees Take Allotted Vacation Time. Research has shown that employees who are committing fraud sometimes resist taking a vacation because they must remain on the job to cover up their fraudulent activity. For some employees, just knowing they must take a vacation every year is enough of a deterrent.

  6. Don’t Limit Your Focus to Financial Fraud. Theft of confidential information and trade secrets can be just as damaging to your business as embezzling funds. Enforce strict procedures for access to sensitive data. Shred all confidential documents and ask your IT provider to secure sensitive information by requiring passwords and dual factor authorization for sensitive information. 

PREVENTION through internal controls is the most cost effective solution to reduce fraud. We are here to help!

The last several years have not gone as planned. Many businesses anticipated that by now, things would be back to “normal”; however this has not been the case for many businesses. Hybrid working environments and operational business changes, among other things, have led to an increase of fraudulent activity specifically targeting businesses.

Fraud Statistics

  • Fraud causes companies to lose an estimated 5% of revenue every year.
  • One-third of cases occur because companies lack internal controls.
  • The average case costs a company $1,509,000.
  • A typical case lasts 14 months before it’s detected.
  • Billing and payroll fraud occurs at twice the rate in small businesses compared to large companies.
  • Almost half of perpetrators try to conceal the crime by creating fraudulent documents.
  • The most used anti-fraud controls at organizations include: an external audit, code of conduct, internal audit department, and management certification of statements.

It’s now more important than ever to protect your organization against fraud. That’s why we created our Internal Control and Fraud Checklist to help you better protect your business.