Legal Speak
Steps to Defer or Detect Business Fraud
By Debra Mason, CPA/CFF, CFE
Thomas, Head & Greisen PC

o you know how susceptible your business is to fraud? Unfortunately, fraud is alive and well. More than one organization has gone out of business due to fraud. However, there are ways to deter fraud, and ways to detect fraud.

The Association of Certified Fraud Examiners (ACFE) does a survey about every two years. The information provides insight into how and why fraud is committed, as well as ways to prevent and detect fraud. I recommend reviewing the 2020 Report to the Nations (copyright 2020 by the Association of Certified Fraud Examiners, Inc.)

Not surprisingly, fraud caught sooner costs less money than fraud detected years later. More of the frauds were perpetrated by employees with one to five years of employment, but the largest amounts stolen were by those employed more than ten years. The top three control weaknesses that contribute to fraud are lack of internal controls, lack of management review, and override of existing internal controls.

Businesses are most vulnerable to asset misappropriation (theft or misuse of a company’s assets) and to corruption (bribery, kickbacks, and confl icts of interest). Businesses can reduce or avoid losses by recognizing the common warning signs of these types of fraud early. Common warning signs are rising expenses and/or declining revenue, abnormally high inventory shrinkage, unfamiliar vendors, lack of timely bank reconciliations, and delayed monthly financial reporting.

Businesses can protect themselves by deterring fraud to the extent possible, and by detecting fraud as soon as possible. Some deterrents and detection methods include:

  • Do background checks before hiring.
  • Have a code of ethics that includes honesty.
  • Have internal controls. Some examples are:
  • One employee should not be able to do all of these tasks: keep the books, collect funds, write checks, and reconcile the bank statement.
  • Someone aside from the bookkeeper receives the bank statement unopened and reviews the statement and cancelled checks for unfamiliar payees, declining deposits, and unusual transactions.
  • Restrict access to bank accounts, including signers, online access and blank paper checks.
  • Conduct or review bank statement reconciliations. Look for unusual items and items that remain on the reconcilia-tion for long periods.
  • Adequately secure inventory and supplies.
  • Review backup documentation before approving or signing checks.
  • Have a way for employees and customers to report suspicions anonymously.
  • Perform periodic inventory observa-tions and asset verifications.
  • Watch for behavioral warning signs from employees such as living beyond their means, unusually close association with a particular vendor or customer, and unwillingness to share duties.
  • Understand and verify the financial information reported to you. This can be as simple as understanding and reviewing the key indicators for your business.
  • Do not rely on “trust”. “Trust” is not an internal control. By “trusting”, you are not protecting the employee or the business. Instead, “trust” gives employees the opportunity to commit fraud.

Take steps to protect your business and your employees from fraud. It could save you money and many hours of frustration. It could also save your business.

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Debra Mason, CPA/CFF, CFE

Debra can be reached at (907) 272-1571

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