Do a quick search for "embezzle," and you’ll find plenty of reasons to worry about the risk of fraud for your business.
According to the Association of Certified Fraud Examiners' (ACFE) "2014 Global Fraud Study," the typical organization loses 5 percent of revenue each year to fraud. Even more alarming is the fact that the smallest organizations tend to suffer disproportionately large losses due to occupational fraud.
And don’t think your company is somehow exempt—it can happen in pretty much any company, and it’s not something that’s typically discovered overnight. The ACFE reports the median duration of fraud, from the time it begins until it's discovered, is about 18 months. But some fraud can go on for years in a company. Stories of fraud, like the two below, can be a wake-up call for your business:
"Federal prosecutors say a Northland woman embezzled nearly $3 million from the sheet metal company that employed her and banks that supported it over [the course of] a decade, enriching herself and bankrupting the company along the way." —KSHB Kansas City
"A longtime office manager for a Lewiston medical practice allegedly embezzled over $100,000 from her employer." —The Buffalo News
Don't Become a Victim
The good news is, you can prevent fraud in your small business by taking some key actions and implementing controls to ensure your business doesn't fall victim to fraud. Start with these three steps:
1. Make sure duties are separated. When it comes to your business's cash, there should never be just one person managing what comes in and what goes out. You need to implement a division of duties, where responsibility is shared by different people in your company. You also need to put added controls in place for the cash that flows out. For example, you should require two signatures on checks, instead of just one. For a dose of added protection, make sure all employees take mandatory vacations: People who steal don’t like to miss work for fear of being discovered.
2. Perform spot checks regularly. You should conduct regular audits on your books at least once per quarter. At the very least, you should monitor the reports in your accounting software that reveal audit trails of transactions taking place. Watch for irregularities or anomalies that can disclose a bigger problem. Audits can be scheduled in advance. However, at least once per year, you should do a surprise audit. And never allow the person who manages your finances to be the auditor.
3. Know your “normal” business story. Many small-business owners find dealing with the cash side of the business an unpleasant experience. That’s one of the reasons fraud can take place more easily in a company. Owners delegate the responsibility to “someone they trust,” perhaps even a longtime friend or family member, and wash their hands of cash flow discussions at the detail level. This “hands off” behavior can set the stage for fraud to occur. If this sounds like you, try a hands on approach instead: Create a cash flow budget, and monitor it weekly to ensure nothing out of the ordinary is happening. Knowing what your business's cash flow should look like can help you more easily identify red flags you can investigate should they occur.
Tweak Your Company Culture
In addition to these three primary actions, there are culture adjustments you can make to minimize the opportunity for fraud:
- Practice open book management with your staff. Your employees have a stake in your business, too. A healthy business means job security for them. Regularly sharing the financial state of your company can help them help you maintain the business you’ve worked so hard to build.
- Keep the communication pipeline open. You can’t be everywhere, but a culture of open communication and trust-building in your business can go a long way to prevent—or reveal—fraud if it happens. The ACFE reports that more than 40 percent of fraud cases were initiated because of a tip, and employees accounted for nearly half of all tips that led to the discovery of a fraud.
- Thoroughly screen when hiring staff. It’s important to have strong hiring practices in place that can weed out people who may put your company at risk. This includes conducting background checks and verifying references for every single hire.
Many companies that are victims of fraud never recover their losses and are pushed out of business. Don't let that happen to you. Take these proactive steps to protect and ensure the financial health of your company.
What controls have you implemented to minimize fraud in your company? Please share with us in the comments below.
Read more articles on financial management.
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