This was a headline in our local newspaper last week. Upon reading the article I learned that the nursery school was a small nonprofit, and the suspect worked there as a trusted bookkeeper for about 30 years. During an audit conducted last fall, it was determined that over the past five years the alleged bookkeeper took at least $150,000. Court documents state that she did this by issuing checks to herself using school accounts for money she was not owed and took steps to conceal the withdrawals.
Small businesses are the most vulnerable to occupational fraud and abuse, according to the
Association for Certified Fraud Examiners (ACFE). In its 2002 Report to the Nation on Occupational Fraud and Abuse, ACFE cites that the smallest organizations, 100 employees or fewer, suffered higher median losses than did the largest organizations (10,000 employees or more). While the largest companies suffered losses of $97,000 on average, small businesses' losses averaged $127,500 based on its survey, which was conducted between April 2001 and February 2002.
Considering the potential losses, it behooves small-business owners to make the prevention of fraud a priority in their businesses. Though no business owner wants to feel it employs unscrupulous people, sometimes temptation or personal financial pressures can push even the hardest working, most trusted employee into perpetrating fraud. I am sure in the referenced case this was a well liked and trusted employee.
The first step in preventing employee fraud is letting employees know you're watching for it. Let employees know that the company actively looks for and takes steps to eliminate fraud by having controls in place that are meant to make employees accountable. This protects both the company and the employee.
Hire the right employees. Conduct background checks for people handling inventory and money. Check past employment, criminal convictions, references, and education and certifications. Also, conduct drug screening since often employees will steal from a business to support an addiction. Remember, however, to always get the written consent of candidates before doing research since many federal and state laws govern the gathering of such information.
Maintain strong internal controls. Have checks and balances in place, For example, you don't want a signatory on the bank account balancing the check book. Likewise you don't want the person processing payments to be the person entering invoices into the accounts payable system.
Make sure expenditures are approved. For every expense, have a manager and someone in accounting approve it. The supervisor will ensure that the expenses are valid, while accounting will run the math.
Monitor cash and inventory. In retail situations or a receiving and shipping department, having security cameras monitor activity at registers and storage areas where inventory is kept. People are less likely to commit fraud if they know they are being watched.
Conduct surprise audits. Catching an employee off guard could be your best bet in discovering fraud. For a small business this does not mean that you need to hire an auditing staff, rather as the owner of the business, and in the interest of knowing what is going on either yourself or another key manager can fill the role of auditor. A simple test can be to examine the payment of 1,000 invoices in detail, including invoice numbers, to whom payments were made, and when payments were made, and quickly determine those that are suspicious. There have been cases where an employee creates a phony company, submits invoices to accounting and accounting sends payment to a P.O. Box. A surprise audit also can uncover duplicate invoice amounts and duplicate invoice numbers, both of which can be red flags for possible wrongdoing.
Control Cash. For a small business owner make it a policy to personally sign all checks, or require a dual signature. Making two employees responsible reduces the opportunity for one of them to commit fraud.
Are you getting the best price? There have been situations where employees have received "kickbacks" from vendors for processing orders for goods and services that may not be needed or at higher than usual prices. Watch for employees that work directly with a third party lender that pays the employer a "finder's fee" for accepting or processing a transaction. To avoid these cases make it a point to know your suppliers and lenders and make competitive purchasing a standard policy.
Have an outside independent accountant develop a system of internal controls and on a routine basis come in to check and validate entries to the accounting system. Knowing that an outsider comes in monthly implies that as a business owner you are serious about accountability and prevention of fraud.
Enforce mandatory vacations. Research has shown that if employees don't take vacation, it can be a red flag.They're afraid to go on vacation because someone is going to find out that something is not right. Requiring employees to take time off can aid in the prevention of some frauds.
Had the nursery school implemented some or all of these procedures I am confident the fraud would have been deterred.
