When it comes to employee fraud, small businesses and non-profits face unique challenges. Organizations with fewer than 100 employees are the most common victims of employee fraud, accounting for close to one in three reported cases. And because of limited resources, it can be difficult to institute the internal controls that are most effective at combating employee fraud.
Segregation of duties – that is, assigning responsibility to different employees for authorizations, deposits, payments, and reconciliation – is the most effective control, as it ensures oversight by multiple parties for key accounting functions. But in offices with just a handful of employees it can seem impossible to divvy up accounting tasks completely.
What can small businesses do if they don’t have the staff necessary to segregate critical bookkeeping and accounting duties? They can still establish effective internal controls if they focus on the essentials by implementing the following best practices:
Set the right tone. Promoting oversight and fraud prevention from new hire orientation onward sends a clear signal to employees. Finance staff should be comfortable with business owners requesting information and scrutinizing transactions; resistance to inquiries is, itself, a red flag for fraud.
Hard-wire information sharing. Mandatory time off, job sharing and shadowing programs, and rotation of job duties ensure that different employees can access individual accounting functions. Such practices also safeguard against loss of institutional knowledge if key personnel leave the organization.
Separate banking functions. At a minimum, separate who should review bank statements, reconcile them, and make deposits. Maintain passwords and control over electronic banking access.
Handle checks with care. Business owners should sign checks only after verifying amounts on supporting documents, giving special scrutiny to expense reports and credit card payments. Blank checks should be stored in a secure location, and should never be pre-signed.
Request reports – and read them. Small business owners are frequently so preoccupied with production, sales, or marketing that they don’t take the time to closely monitor financial statements, but such oversight is crucial. Monthly review of payroll and a comparison of budget versus actual results can highlight unusual activity and trigger a deeper review.
Consider outside help. Periodic third-party review by a trusted outside firm, whether a CPA or forensic accounting firm, can discover problems not otherwise caught by internal safeguards.
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Aho + Associates helps companies establish internal controls through its financial forensics services
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