News from Green & Seifter CPAs

Small Business Owners: Where there is Opportunity, there is Temptation

by Kathleen Kaminski

Small business owners, take a minute and ask yourself: Am I in control of my finances? Do I know for a fact that all cash coming in is being recorded accurately and professionally? When is the last time I reviewed my bank statement?

Did you know that lack of adequate internal controls is the leading cause of fraud for small business? During tough economic times, there is often more incentive for internal fraud, and employee theft and fraud typically rise during a recession. Even long-term, trusted employees could be tempted to dip into the pot, especially if their personal finances are at risk. That's where internal controls can make a big difference to the business owner's bottom line.

Internal controls are a system of checks and balances that are put in place to help prevent fraudulent appropriation of assets. An internal control structure is dependent on the entity's size and complexity. Small and mid-sized companies generally have an informal system to ensure that internal control objectives are achieved. Internal controls must be tailored to each individual business. Here are a few examples of internal controls which are useful to small businesses:

Cash receipts. All checks received should be immediately stamped "for deposit only," and deposited daily. Different individuals should be responsible for recording cash receipts, preparing deposits, and reconciling bank accounts. Bank accounts should be reconciled monthly and the reconciliation should be done by the owner, if practical.

Bank Statements. Small business owners should always open the monthly bank statement and review the canceled checks themselves. Temptation is reduced if someone else is looking at the bank statements.

Cash disbursements. Blank checks should be stored in a locked cabinet, and access to blank checks should be limited.

Check signing. Limit check signing to one or two people. The person who signs a check can only do so if there is an invoice attached. Also, the bill must be from an approved vendor. Use of a signature stamp must be carefully monitored or avoided, if possible.

Bank account. If accessible online, the bank account should be checked on a daily basis for unusual transactions. Access must be limited.

Fixed assets. Furniture and equipment should be secured and properly accounted for. Purchases and disposals of fixed assets should be approved by the appropriate individuals.

Inventory. Storage facilities should be locked and inventory should be counted periodically.

Accounting records. Computer passwords should be used to restrict access to data. Backup of the accounting system should be made on a regular basis and stored off site.

Employees. Vacations should be mandatory for employees. Consider criminal background checks on new employees. Consider cross-training and rotating employees in the accounting/billing office.

The main element required for fraud is opportunity. Accordingly, the best opportunity a business can offer a fraudster is having weak or nonexistent segregation of duties. Oftentimes small business owners have one person do all the billing, all the payments - everything. That can be dangerous and also unfair to that employee who is placed in a position of having too much responsibility.

Segregation of duties is a critical internal control aimed at limiting opportunities for fraud. It reduces the risk of mistakes and inappropriate actions.

Here are a few examples of segregation of duties:

The person who maintains and reconciles the accounting records should not have custody of checks.
The person who opens the mail and prepares a listing of checks received should not be the person who makes the deposit.
The person who opens the mail and prepares a listing of checks received should not be the person who maintains the accounts receivable records.
The person signing the checks should not be the person reconciling the bank account.

Quite simply, at least two sets of eyes are required for any transaction!

So business owners, take time out of your hectic schedule to address these issues. Doing so will be worthwhile for everyone involved.

Kathleen Kaminski, CPA is a Tax Manager with over 25 years of experience in public accounting. She assists individual and business clients in the areas of accounting, tax planning and preparation. Kathy can be contacted at 315.701.6322 or KKaminski@GreenSeifterCPAs.com.