As a business owner, you hope that fraud is something you’ll never have to deal with. But the unfortunate truth is that businesses — particularly small businesses that are growing — are ripe with opportunities for fraud. It could be happening in your business without you even knowing it.
The biggest risk of fraud in a small business is cash leaving your bank accounts without your knowledge or consent, typically as a direct result of a dishonest staff member who has gained your trust and increased bank authority. This misappropriation of funds — and facts — can be hugely detrimental to your business.
Ironically, as I type this, one of my clients is dealing with this very issue, and has reminded me that on top of dealing with the logistics of the post-fraud world, the emotions of finding out you’ve been betrayed by someone you trust are overpowering. Know that being taken advantage of in this way is nothing to be embarrassed about – you have day-to-day priorities to address, and you have every reason to trust those who work for you. That said – some simple controls can help you avoid what my client (and friend) is now having to endure.
So when you run a small business, potentially with one person in charge of the finances, how do you prevent fraud if you don’t know it’s happening?
What Are Some Examples of Fraud?
Before we go into how to prevent it, let’s look at some of the most common occurrences of fraud in small businesses. They include:
- Creating a fictitious vendor and cutting them checks
- Redirecting automatic payments to personal bank accounts
- Use of company credit cards for personal purchases
Now, if you’re thinking, “I would totally catch that if it was happening in my business,” you are right; you might. But if you don’t have a firm idea of what exactly is going on with your finances, it can be easy for these occurrences to slip through the cracks. And the smarter the employee, and the more accesses he or she has, the more he/she can spread the losses throughout the business where they might not be noticed as quickly.
How Does an Owner Prevent Fraud
So how do you, the owner, running at 200 miles per hour, prevent these types of fraud from happening further down in your organization? Here are 4 hacks for keeping ahead of it:
1. Sign Your Own Checks
It’s completely appropriate to have a financial manager or bookkeeper sign your checks, but once a year, take a month and be the person to sign every single check in your business.
Is it time consuming and a bit tedious? Potentially. But signing every single check for one month can give you invaluable insight and help you prevent fraud for the entire year. Now, I know in many business, checks are sent out via ACH, wire, or other means. Take this as a metaphor for “personally authorize EVERY check that leaves your business.” For more on this, be sure to check out my book which has an entire chapter focused on cash management and control: http://tinyurl.com/yourfirstcfo
For that month, you’re literally seeing every single dollar that’s being spent in your business and what it’s being spent on. Knowledge is power; knowing where your money is going can help you to spot any leakage or potential fraud down the line.
The important thing about this method is not to make a big show or announcement as to when you’re going to do this. Just choose a month randomly and take over the check-signing process for that month. This will give you an accurate idea of the money that’s being spent in your business at any given time, which will help protect you from future fraud. And it will also send a signal to your employees or outsourced bookkeepers that you are watching, and could pop up any time.
2. Sit With Your Team While They Reconcile the Bank Accounts
Once a quarter, you’ll also want to sit in with your accountant or bookkeeper as they reconcile your bank and credit card accounts. As they’re reconciling, you’ll want to watch out for certain phrases or excuses. If you hear them talk about “timing issues” or “rounding up”, those are HUGE red flags that something funny is going on with your books, or you are dealing with a negligence. When it comes to cash, a penny is a red flag, and “timing differences” require clear and unambiguous support for every penny as well.
If any service provider or internal accountant argues with you on that point, one of two things is happening: either your accountant or bookkeeper is seriously misinformed and unqualified for the job, or they’re mucking up your books on purpose, neither of which are appropriate for the level of responsibility you’ve entrusted them with.
Whatever the case, if you’re concerned that your bank and credit card accounts aren’t being reconciled correctly, you’ll definitely want to bring in an external CPA to review your bank records. Not only will they be able to give you insights into the reconciliations, they can also advise you on how best to separate the duties within your business and what type of reporting makes sense for a business of your size.
3. Make Sure You’re Getting Accurate Reporting
Reviewing your monthly Profit and Loss, Balance Sheet and Cash Flow reporting is a bit trickier, but definitely worth the time to help prevent fraud. Every so often, ask your accountant or bookkeeper for all the details behind a particular line item on your financial statements. Pick a number or two from a report and say, “I want to see all the details behind this number… and I want you to explain it in a way that makes sense to me.”
The reason for this is two-fold: you want to be sure your report providers are not a) purposefully misstating things, or b) neglecting to put in the necessary effort to really wrap their head around your numbers. Either way, you want to know.
4. Reconcile Once a Quarter
Every single account on your balance sheet should be reconciled at least once a quarter and signed off on by your bookkeeper or accountant. These reconciliations should be clear, easy to follow, and explain every dollar that is sitting on your balance sheet. Each one should be saved either electronically or on paper. And you should ask for evidence of those reconciliations. If you want to prevent fraud, this needs to be a non-negotiable with your accounting team.
Fraud is a frightening to business owners, but it happens every day. Like most things, until it happens to you, it’s hard to imagine; after it does happen to you, it’s hard to swallow. But if you know what to look for — and what to do to prevent it — fraud doesn’t have to be a reality in your business.