Fraud and embezzlement don’t just happen at large companies. According to a 2018 study by the Association of Certified Fraud Examiners, companies with under 100 employees are the biggest victims of internal fraud with the median loss at $200,000—nearly twice the damage to larger companies.
More than 40 percent of fraud is traced to a lack of internal controls. The good news: they don’t have to be complicated or expensive. The best way for small businesses to battle fraud is a simple segregation of duties. Here, different people are responsible for authorizing expenditures, custody of cash, and reconciliation of expenses. How?
Only the owner or a designated, trusted manager should sign checks, authorize electronic payments, or perform fund transfers. Management gets to see how the company is spending its money, and the disbursement function is kept separate from bookkeeping and accounting. Embezzlement is much easier to achieve when the same person who signs checks and authorizes electronic transactions also enters disbursement transactions in the accounting records.
If customer collections are a regular part of your business, consider having an owner or manager occasionally open the mail before passing it on to accounting. That’s one way to detect unusual transactions before they’re recorded in the company books. Alternatively, you might ask someone separate from accounting to open the mail and prepare a deposit slip. The practice of making daily deposits is also a good control.
For companies with limited resources, periodic review of bank reconciliations by someone outside of accounting can provide a mitigating control. Non-accounting personnel performing these reviews will of course need to be trained. This also helps to ensure continuity of operations when accounting employees take vacations or leave the company.
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