Fraud Sequel

My installment series on fraud has spawned a fourth chapter. And the reasons for the sequel are twofold. First, I got a huge reaction from people relating their first-hand experience with fraud in business. I knew that fraud had become more common but it appears we have veritable epidemic on our hands.

I don’t know about you but I was taught it was wrong to lie, cheat or steal. But then I’m reminded of The Fraud Triangle and the elements that lead to fraud: financial pressure, opportunity and rationalization. Evidently, many people find themselves under financial pressure, with an opportunity and are able to rationalize committing fraud.

Which leads me to the second reaction, which was people wondering what they should do (or have clients do) to minimize the chance of internal (workplace) or external fraud. Thus, find below my Top Ten Ways to Prevent Fraud. It is not a comprehensive list by any means, but it will make a world of differenct if these steps are implemented.

My Top Ten Steps to Help Small Businesses Prevent Fraud

1. Hire carefully—Do background and credit checks before making offers to candidates. It is easier to not hire a crook than to deal with one after they are an employee. Common sense? Yes, but it is amazing how many people commit fraud at multiple employers.
2. Have a strong code of conduct and make every employee aware of it. As in most relationships, communication is key. Having a strong code of conduct means the company is aware of the risk and has a system of controls. It will also encourage tips from other employees—one of the most common ways to catch a fraudster.
3. Enforce the code of conduct—Have a zero tolerance policy for ethical breaches. There must be consequences for breaking rules. And fraud is not just breaking rules, it is breaking the law. There are no second chances here.
4. Have accurate and timely financial statements and drill down to the transaction level on things that don’t look right. Timely and accurate financial information is foundational to much in business. This is another example. If something doesn’t look right, find out why. If you keep getting excuses on the timeliness of financial statements, don’t accept them.
5. Have budgets so that you can manage by exception. Any accounting program will calculate variances between budgets and actual amounts. If they are material, find out why.
6. Establish a system of internal controls that is rigorously enforced. Use separation of duties as much as possible. A good system of internal control will prevent or catch many fraud schemes. Any system can be beaten, especially if collusion is involved. But the internal control system is vital.
7. Check online banking activity every day. This is where you can catch any unauthorized transfers out of the bank accounts. These can originate with employees or outsiders. By checking every day, you limit the damage done and increase the chances of catching the perpetrators.
8. Use Positive Pay and ACH debit filters. These tools automate the prevention of almost all unauthorized activity. Use them.
9. Reconcile bank accounts monthly. While you should check online every day, the monthly reconciliation is more thorough and is the keystone to the integrity of your accounting system.
10. Make every employee take a vacation annually. No exceptions! This forces cross training and often uncovers fraud schemes. When someone in accounting hasn’t taken a vacation in years, be suspicious.