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Prevent internal fraud – the most important steps

The frequency of small business fraud is 28% of all small companies. The median loss is between $100,000 and $300,000.

Business Fraud Prevention

The Problem

Fraud and embezzlement are rampant in small companies of less that 100 people. Common schemes of fraud and embezzlement include:

  • Signing checks without authorization
  • Phony vendors
  • Wire transfer schemes
  • Cash larceny
  • Theft of inventory
  • Payroll schemes
  • Stealing receivables
  • Expense reimbursement schemes

The Solution

The most important overall solution to stop small business fraud and embezzlement is internal controls. The most important steps in the internal controls to start with are these:

  1. Review your bank account each month
    1. If you receive it electronically, request a digital copy of all checks to be included in the statement
    2. If you receive it in the mail, have the statement sent to the owner’s home so he can be the first to open it and review it
  2. These are the items to review each month:
    1. Look at each check – do you recognize the payee?
    2. Look at each electronic debit – do you recognize the payee and is the amount reasonable?
    3. Review the deposits – do they look correct?
    4. Review the balance – does it seem reasonable?
    5. Look at your payroll debit if you use a payroll service – does it look correct?
  3. DO YOUR BANK RECONCILIATION – THIS IS THE MOST IMPORTANT STEP – you should either do the bank reconciliation yourself. If your accounting staff does the reconciliation, then you need to compare all figures with the General Ledger figures each month to verify that they are correct. You can do the reconciliation in your accounting software or manually.
  4. There are many other internal controls to set up, but this is the bare minimum on your start to guard against fraud and embezzlement.

Sad stories of companies defrauded

The theft was fatal’: Employee used 189 credit-card refunds to embezzle nearly $200,000 — bankrupting packaging firm