Fraud Alert!

Accounting Weekly  reminded us this week that fraud is still rampant in small business, and reiterated who is most likely to commit fraud.

I would expand that to say anyone internal that has unsupervised control of finances.  Case in point:  a small construction firm.  The bookkeeper at the time was a family member that rarely came in, so the receptionist volunteered to enter and process the weekly payroll.  During an internal audit several years later, it was discovered the receptionist would put in employees vacation pay correctly, but filled out their timesheet as if they had worked during their vacation time, and put those vacation hours in as straight pay – increasing the vacation hours bank with each pay period, and never decreasing for actual time off.  Then the receptionist left, taking all of that “accrued” vacation time.  At the audit, all the required vacation requests were on file, and the production calendar showed the receptionist off.  When confronted, receptionist claimed they didn’t know that vacation had to be entered any differently.  They claimed there was no problem with their filling out their timesheets, approving their own timesheet, entering the payroll, writing the check, signing the check, and cashing it.  In fact, the receptionist claimed that the bank told her she had the right to do so.

In another situation, the internal bookkeeper was a long-standing family friend that had been with them through births, marriages, graduations & deaths. But when it came to finances, the bookkeeper was sneaky.  The owner’s cell phone service was through Verizon, so the bookkeeper got Verizon.  The owner had an American Express card, so the bookkeeper got one too.  When it was time for the bookkeeper’s bill to be paid, they paid with the company bank account.  No one questioned the vendor, because it was well known that was who the owner did business with.

As the article pointed out, there are simple and free internal controls that can be implemented to ensure this doesn’t happen.  Two internal controls I especially advocate for are:

  • While it’s sometimes not ideal, it’s best if the internal person doesn’t have signature authority on the account. Having a second set of eyes on approving payments, viewing the attached invoices prior to signing the checks could have eliminated both of the above examples.
  • Lock up sensitive data and/or cash! I know this seems overly simplistic, but controlling who has access to bank account information, checks and cash can stop casual sticky fingers.

 

In the receptionist example above, I remember after I took over accounting, the cash register didn’t balance to the daily sales.  Coincidentally, the receptionist had been complaining that day that their daughter had fallen on hard times.  That night, the cash register is short $60.00.  When I informed the owner, they claimed they must have taken the cash because the receptionist would never do so.  We were never able to prove it, but every time the receptionist fell on hard times, the cash register was short.  The business owner was in denial and took the blame for it every time.

Without sounding self-serving, having an outside bookkeeper or someone to review transactions & make spot audits is a terrific way to minimize any fraud in small business.  Not going to say it doesn’t happen, even with outside bookkeepers or accountants, but it’s definitely greatly minimized!