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Small Business Human Resources Workforce Development Your Questions Answered Success Stories

May 2007 — Vol. 85, No. 4


Nine ways to

Prevent fraud in your workplace

CPAs offer advice for small and midsize businesses


Over the past couple of years, the public’s attention has been captured by cases of corporate fraud involving very large, publicly traded businesses. In cases like these, the ensuing litigation often goes on for many years and has destroyed the careers of business executives and practitioners alike.

Small businesses can be targets of fraud and deception too. According to the American Institute of Certified Public Accountants (AICPA), small and midsize companies suffer a greater share of fraud losses than do the largest companies. The AICPA is the nation’s largest professional nonprofit representing CPAs in the areas of audit, tax, accounting and consulting services. 

Underscoring the endurance of fraud, a national fraud association recently found that U.S. losses from fraud, including corruption, fraudulent statements and asset misappropriation, rose to an estimated $638 billion last year, up from about $400 billion a decade ago.

According to AICPA, CPAs suggest the following steps that can help keep businesses away from the courthouse and detect fraud before it eats into profits.

  1. Set clear standards. One of the best ways to help safeguard a business is to set clear standards from the beginning. This includes an appropriate example and ethical tone, starting from the top down. An employee manual can be helpful in establishing the principles and values to guide your organization. In a small organization, an employee manual levels the playing field and keeps the rules from becoming arbitrary. The rules apply to everyone. If someone is dismissed and you find yourself in court, the manual can be a reference that explains what actions warrant dismissal.

  2. Check employee references. When hiring new employees, check references and perform background checks that include employment, credit, licensing and criminal history. The cost is far outweighed by the benefit. For example, a business owner should be wary of hiring a bookkeeper with bad credit because the weight of crippling financial obligations could turn an otherwise honest person into a thief.

  3. Secure your organization. Some deterrents are simple to initiate, but often go ignored. Secure organizations, for example, closely guard and monitor their checks. Using prenumbered checks enables you to audit for missing checks. Also, checks clearing out of sequence can be spotted more easily. All checks should be kept under lock and key, and keys should not be distributed. Other precautions include having a “voided check” procedure and never signing blank checks. All disbursements should be reviewed on a regular basis. Scan for, then scrutinize, checks made out to suppliers you don’t recognize, checks made out to an amount for cash, and missing check numbers or checks appearing out of sequence.

  4. Safeguard payroll. Payroll is another area subject to abuse. Small-business owners and managers should take the extra time to review every payroll check personally. Although time consuming, this procedure provides a monitor to assure employees are being paid appropriately. This can be especially important when a business has temporary and part-time staff. Although not always possible in a small business, certain duties should be maintained separately. For instance, the person who “cuts” or has custody of the checks should never be the person who has authority to sign. The person opening the mail should not record the receivables and reconcile the accounts. Even a small business can take some steps to separate important functions.

  5. Control who reviews sensitive documents. Small-business owners should control who first receives the bank statements and other sensitive documents. It is not farfetched for a small-business owner to have a separate post office box for the purpose of receiving bank statements, customer receipts or any other sensitive documents. This helps eliminate the possibility that someone intercepts the mail first for the purpose of stealing or covering up an earlier theft.

  6. Consider independent review. All account reconciliations and general ledger balances should have an independent review by a person removed from the day-to-day transactions, because theft often occurs when bookkeeping is sloppy and unsupervised. People outside the direct bookkeeping function within your organization should be familiar with your company’s bookkeeping and record system. This permits spot checks and reviews, better ensuring nothing is amiss and providing a deterrent for fraudulent activities.

  7. Consider hiring a CPA. If a business owner is not in a position to provide this level of review, make sure your client knows that CPAs can be hired to take on some of the independent review function, or provide all of the required bookkeeping services. Make sure you are clear that a CPA providing these services will not necessarily uncover fraud, but will enhance the control environment, possibly deterring fraudulent activities and benefiting the business owner on many different levels. For example, CPAs can review monthly financial results with the owner, helping to spot trends indicative of fraud or to find opportunities to enhance profitability.

  8. Consider annual audits. Even though it may not be required, obtaining an annual audit is a good idea. An audit will not discover all fraud within an organization, but it will give you an opportunity for someone removed from the daily operations to take a “bird’s eye view” of the business. An audit also tends to motivate all bookkeeping-related staff to keep things honest because they can never be sure what questions an auditor is going to ask or what documents an auditor may request to review.

  9. Do additional research. Check out the AICPA’s Audit Committee Effectiveness Centerfor additional free articles, tools and resources companies can use to prevent and detect fraud.

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