December 2, 2016 | by Christi Todd
Could your small business survive a six-figure loss and the ensuing turmoil? Unfortunately, many can't. And that highlights why instituting internal controls is so important.
According to the Association of Certified Fraud Examiners' 2014 Report to the Nations on Occupational Fraud and Abuse:
The median loss to small businesses (those with fewer than 100 employees) that experienced a fraud loss was $154,000.
Small businesses suffered 28.8% of all losses studied.
In nearly 60% of cases, NO assets were recovered.
Those are sobering facts. The good news? There are a number of low-cost ways to reduce your business' exposure to loss from someone stealing your organization's assets. Let's look at a few of them:
Code of conduct/anti-fraud policy: Will signing a piece of paper keep an employee from stealing? Probably not. But it will set out your understanding of what is acceptable and unacceptable behavior.
An activity that is clearly theft to you might be perceived by an employee as simply a perk of the job. Spell it out upfront. Your payroll provider probably has some good examples, and an internet search will yield more. Cost to you: a few hours' research and some paper. We recommend also consulting your labor attorney on this type of matter.
Employee assistance programs (EAPs): What does this have to do with reducing employee theft? Well, an EAP won't keep bad people from taking advantage when they have the opportunity. However, fraudsters are frequently good employees with a great work history who make bad choices due to personal stressors such as financial or health problems, divorce, addiction issues, etc. Taking away the motivation to commit fraud can help keep fraud from happening in the first place.
An EAP directs employees to the resources they need to get help and is surprisingly affordable. Speak with an insurance broker who specializes in employee benefits.
Eliminating checks: Check tampering is still a common way to commit theft, and the median loss in check-tampering cases is around $120,000. Many business owners give their accounts payable (A/P) resource signing authority on the company checking account or direct access to their online banking bill-pay service, which are unnecessary risks.
A better option: Change your A/P system from a manual check-issuance program to an application such as Bill.com. With this application, you can review and approve vendor bills, and then Bill.com issues the payment. You control who in your organization is authorized to review and approve bills and who can release them for payment, minimizing opportunities for fraud. No more blank checks floating around your office, and the system keeps a detailed log of each authorized user's activities so nothing in the A/P system can happen in secret.
Segregation of duties: Two is better than one! Segregation of duties has traditionally been impossible for small organizations. But that's changing. For example, at Supporting Strategies, our tech-forward, team-based approach enables proper segregation of duties and provides clients with direct access to a full-time accounting back office while only paying for the hours they use.
We reconcile bank activity and all balance sheet accounts with two sets of eyes, which adds quality assurance to your bookkeeping. Plus, we double-check our own work and stay abreast of the latest accounting software, payroll services and other applications so you don't have to.
There are plenty of other highly effective techniques that you should explore, such as hotlines (THE number one way to detect fraud, by the way). I encourage you to read more at the ACFE web site.
As the Report to the Nations makes clear, there is no one way to eliminate fraud. Having the right internal controls in place, though, can help reduce the impact. Thanks to Paul McCormack at McCormack Writes for this topic idea.
Contact us to learn more about how to set up the proper internal controls for your business.