Is your organization susceptible to fraud? The answer is yes. All entities, especially small businesses and not-for-profit organizations, are susceptible to fraud. The median loss from fraud in a business with less than 100 employees is two times higher than the median loss from fraud in a business with more than 100 employees. Approximately 40% of these small business frauds are caused by the lack of internal controls.
The first step to enable a small business to detect fraud is to understand the commonality of the behavioral red flags portrayed by fraudsters. Some common behaviors include employees:
- Experiencing financial difficulties
- Living a lifestyle beyond their means
- Having unusually close associations with a vendor/ customer
- Having control issues of certain duties
- Having family problems
- Having addiction issues such as gambling and alcohol
Knowing the type of behavior portrayed by typical fraudsters will increase your chances of catching fraud within your business. Ideally, the goal for a business is to prevent fraudulent behavior before it starts. To do this, internal controls should be set up to decrease the opportunity of fraudulent behavior from occurring. These controls include the following:
1. Proper segregation of duties
- Employees with access to the accounting records should not have signing authority or the ability to perform E- transfers
- Bank statements should be mailed/ emailed directly to the owners.
2. Written code of ethics
- Having a standard onto which employees should follow, will allow the expectations of management to be known throughout the company.
3. Checks and reports reviewed on a regular basis
- Bank reconciliations, accounts receivable listings, accounts payable listings, financial statements, etc. should be reviewed on a regular basis ideally by ownership or an individual who did not prepare the file
4. Hiring process
- Background checks and reference checks should be completed on all employees prior to being hired
- Hire financially literate/ competent employees to deal with the company’s accounting books
5. Reporting hotline
- There should be an anonymous and secure way of reporting suspicious activity
6. Get advice
- Your external accountant can evaluate your accounting systems and processes, assess any weaknesses in internal controls and provide recommendations to strengthen your organization’s controls
- Review whether an annual audit of your entity’s financial statements should be completed
