Preventing Corporate Fraud

TASA ID: 321

Fraud can happen in a business of any size, but small businesses are often targets of fraud. According to the American Institute of Certified Public Accountants, small and midsize companies suffer more losses due to fraud than their larger counterparts. Experts estimate that companies lose 5% to 6% of their annual revenue to fraud, so every company should have a comprehensive fraud prevention program. 

A fraud prevention program is not difficult to implement. It simply consists of education, investigation, and proactive prevention policies. Since employees are the most likely to report issues or any fraudulent activities, you certainly want to give them both the knowledge and the tools to help your company weed out any instances that may be taking place.  And while fraud prevention efforts are designed to stop employee fraud, note that any investigations of suspected instances of fraud or employee theft may also act as a deterrent to other employees who may be either committing or contemplating fraud.

The bulk of your company's fraud prevention efforts should be focused on the creation and implementation of proactive preventive techniques. This includes establishing internal controls and putting into place policies and procedures that are specifically designed to prevent fraud. One of the best ways to develop prevention policies may include utilizing an experienced anti-fraud professional. Make sure to find one who is experienced and has investigated numerous instances in order to help you to develop the most relevant and most effective anti-fraud controls. Some of these controls may include:

  • Establishing clear and easy-to-understand standards from the top down.
  • Having an employee manual that clearly outlines all rules and standards in order to keep the rules from becoming arbitrary.
  • Always checking references and performing background checks on new hires, including employment, credit, licensing, and criminal histories.
  • Securing physical assets, access to data and money on all levels. This should include monitoring of all checks, using pre-numbered checks, keeping checks locked up, having a “voided check” procedure and never signing blank checks. Review all disbursements regularly.
  • Segregating of duties of employees. This means dividing activities so one employee doesn’t have too much control over an area.  Separate your accounting and account payable functions.
  • Small-business owners and managers should review every payroll check personally. The person who has custody of the checks should never have check signing authority. The person opening the mail should not record the receivables and reconcile the accounts.
  • A system for proper authorization of transactions to ensure that employees aren’t exceeding their authority.
  • Conducting independent performance reviews including audits, surprise check-ups, inventory counts, or other procedures to verify accuracy and compliance with policies and procedures. These reviews should include all account reconciliations and general ledger balances. Make sure this is done by someone outside the responsibility area such as an outside accountant. This also provides a deterrent for fraudulent activities. 
  • Instilling an anonymous reporting mechanism which may take the form of an employee fraud hotline.
  • Controlling who first receives the bank statements and other sensitive documents. This may include a separate post office box for the purpose of receiving bank statements, customer receipts or any other sensitive documents.

While no company, even with the strongest internal controls, is completely protected from fraud, strengthening internal control policies, processes and procedures will go a long way towards making your company a less attractive target to both internal and external criminals.

 This article discusses issues of general interest and does not give any specific legal or business advice pertaining to any specific circumstances.  Before acting upon any of its information, you should obtain appropriate advice from a lawyer or other qualified professional.

This article may not be duplicated, altered, distributed, saved, incorporated into another document or website, or otherwise modified without the permission of TASA.

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