Our firm was recently brought into a new client for some profitability analysis.  We couldn’t determine why the business wasn’t more profitable based on its past history and industry norms.   When we delved deeper into some accounts we discovered that a 25 year “trusted” employee, who was single handedly responsible for the bookkeeping/accounting/receivable and payable functions, was embezzling hundreds of thousands of dollars from the Company.  This was accomplished by intercepting accounts receivable checks, fraudulently signing the owners name to cash disbursement checks, and even making fake bank statements using a home computer and scanning equipment to help cover the fraud.  As a result the cash accounts, accounts receivable, inventory and accounts payable accounts in the financial statements were all erroneous. Unfortunately, the business has very limited theft coverage ($50,000) and even the bank may not be liable for the forged checks since there is usually a thirty day window for business owners to report irregularities.

In today’s world, small business owners must take proactive steps to prevent fraud.  Establishing control policies, insuring that those policies are properly implemented and monitoring the control activities put into place are essential for business owners to protect themselves against fraud.

One important control activity that can greatly reduce the risk of fraud is segregation of duties.  It is often difficult for small business owners to properly segregate duties due to a limited number of employees.  When businesses are unable to assign responsibilities to achieve adequate segregation of duties, the following owner involvement can be invaluable to his/her business.

• The owner should be the only authorized check signer and should not sign checks without the proper documentation attached
• Never sign a blank check under any circumstance.
• The owner should receive bank statements directly, preferable at home.
• The owner should review bank statements, cancelled checks and other return items included with the bank statement prior to forwarding them to bookkeeping.
• The owner should review monthly bank reconciliations for unusual reconciling items.
• If at all possible, have someone not associated with the bookkeeping/accounting function restrictively endorse all checks upon receipt.

Control can further be enhanced if the owner (or the outside accountant) prepares bank reconciliations on a surprise basis.  This direct oversight by the owner will create an environment that will help protect small businesses against fraud. 

If you’re a small business owner, be proactive and take steps to get involved and prevent fraud.

To learn more or get additional information contact Rainmakers at 847/251-3327.