According to statistics, about 90 percent of businesses report that they have experienced fraud or theft of some kind. Common frauds include embezzlement, cheque and credit card fraud, employee dishonesty, vendor and internet fraud.
Proper accounting records, reports and controls can prevent many of the losses associated with fraud. Here’s a checklist of steps to consider:
- The owner or senior manager must set a good example. If employees see them using company funds for personal items and/or fudging expense accounts they may do the same.
- All new employees’ resumes and references should be checked for accuracy. Someone who cheats on a resume may cheat on their accounts too.
- Consider fidelity bonds for bookkeepers, controllers and purchasing agents.
- Ensure job descriptions are up to date and the duties involved are completed.
- Two people should open the mail, preparing a list and dollar value of all cheques received.
- The two employees must sign the list of cheques and a photo copy of the list be given to someone other than the person making up the deposit.
- The original copy will go with the cheques to the person making up the deposit.
- All cheques must be stamped: “For Deposit only to the company bank account” as soon as they come out of the envelope.
- The person receiving the copy of the cheque list must review the deposit to ensure all cheques are deposited.
- Cheques for payments should not be signed unless there are proper backup documents supporting the cheque amount. These documents should include: original copy of the invoice, (be suspicious of copies as it may result in a duplicate payment), receiving documents, proper signatures and an indication that the invoice has been reviewed for accuracy and that the proper goods have been received.
- After cheques are signed they should be mailed out by someone other than the person preparing the cheques as employees have often changed cheques after signature and adjusted the accounting records accordingly.
- The owner or senior manager should have the bank statements delivered unopened to their desk or in the case of electronic banking the owner or senior manager should review all the payments for alterations, proper signatures and payees. Deposits should also be reviewed and unusual transactions questioned.
- The owner or senior manager should review and sign the bank reconciliation prepared by the accountant/bookkeeper each month. This ensures their work is reviewed and gives the manager an opportunity to see any unusual reconciling items.
- In many small businesses it is impossible to properly divide duties to ensure that one individual does not have control over all parts of a financial transaction but any divisions are helpful.
- Ensure unused cheques are locked up and voided cheques are tracked.
- Use a cheque embosser to prevent alterations of cheque amounts.
- Cancelled cheques can be returned to the wrong hands and be re-written to the fraudster. Excessive voids and cancelled or returned cheques are common indications of theft.
- Ensure all employees take their earned vacation. Embezzlements are often uncovered when an employee is away.
- If an employee seems to have a lifestyle better than would be expected for his or her salary it might be appropriate to do some checking.
- Control purchases by using requisitions and purchase orders. Ensure that different employees place and approve purchases.
- Insist that all items received be checked against the purchase order and that the receiver signs for the items received. Any shortages/overages must be identified.
- Be especially careful of invoices from a word processor. Check that the HST number actually exists by checking with the CRA. Check that postal codes correspond to the address on the invoice. One large fraud involved phony invoices and phony names on the invoices. The cheques were picked up by the fraudster who was a senior manager.
- Fraudsters often create invoices with rounded amounts. If the invoice does not have pennies, it may be a sign that further investigation is needed.
- Some employees may be aware of the dollar threshold for management approval and create an invoice just below the approval level. For example, if the approval level is $6,000 and an invoice is received for $5,997, it might be worth doing more research on the invoice.
- Be wary of a customer that suddenly increases their order after several small ones. They may never pay for the large order.
- Take all complaints seriously and dig further into the situation to identify the cause of the complaint and what else could be behind it.
- Inventory shortages could be an indicator of fraudulent activities.
- Every company should have a “conflict of interest” policy pertaining to gifts and entertainment as fraud centred on purchasing may include fictitious invoices, over billing schemes and duplicate payments.
- Retailers must train their sales staff to ensure that all sales are recorded and that credit card payments are properly reviewed to protect against credit card fraud.
- Refund procedures must ensure the merchandise is returned and that the original invoice is attached to a copy of the refund invoice. Credit card purchases must be credited against the same credit card.Any business can be a victim of fraud. Constant vigilance is required, but implementing these controls will make it a lot harder for you to be a victim.
