Warning Signs of Potential Fraud in Small Businesses
Small businesses generally susceptible to fraud and embezzlement given that they typically have limited resources and often do not have the fraud prevention systems in place that larger organizations do. Anotherreason small businesses are more susceptible is due to the fact that usually a single person is in charge of all the accounting functions rather than a team, which makes it easier to commit and hide fraudulent activity.
Being aware of the warning signs and red flags of fraud can help business owners prevent and detect fraudulent activity.
Some Early Warning Signs
Behaviours of people more likely to commit fraud:
1. Unwillingness to share duties or take vacations.
2. Refusal to implement internal controls or procedures: Employees who refuse or make up excuses for not implementing internal controls in order to hide or extend their fraudulent activities.
3. Employees who work excessively but their accounting records are in a state of disarray: The employee appears to be working hard and is always busy. Therefore they are given leniency regarding their failure to maintain detailed records or provide receipts. If leniency is given, the early warnings signs of fraud can be missed.
4. Past legal and/or addiction problems.
Activities indicative of fraud
1. Financial information being reported is inconsistent with other non-financial performance indicators. For example, in the food service industry, daily sales may be inconsistent with customer turnover.
2. Bank/credit card reconciliations are not up to date.
3. Replacement of existing suppliers with someone who has an unusually close relationship with an employee or a supplier that insists on dealing with only one employee.
4. Change in lifestyle: Employee appears to suddenly be living a lifestyle above their financial means.
5. Excessive transactions: Multiple payments on single bills or numerous transactions to correct errors could be an attempt to bury or cover up fraudulent transactions.
Taking the time to understand and periodically assess and update your internal controls with the help of your external accountant is key to reducing the risk of fraudulent activity within your business. Below are a few simple procedures that could be implemented that would strengthen internal controls
Simple controls to help mitigate fraud
1. Review bank reconciliations and online banking activity for unusual or uncleared items as well as missing or out of sequence cancelled cheques.
2. Implement multi-person sign offs for issued cheques, overtime and expense reports. Having other independent parties review and authorize transactions serves as a check and balance to deter and prevent fraud.
3. Prepare budgets which will help owners develop expectations. Variances between actual to budget should be investigated thoroughly.
4. Mail should be collected and opened by the owner or someone who has no accounting functions. This way, bank statements cannot be tampered with and cheques and payments are received directly by the owner. Cancelled cheques can be quickly reviewed for unfamiliar suppliers. If deposits at the bank are done by a person other than the owner, the owner should also complete the deposit slip before passing it off.
5. Simply notifying staff that you are implementing fraud prevention measures can act as a deterrent.