Tips To Protect Your Business From Fraud

Many businesses are susceptible to fraud due to a misunderstanding of what a complete system of internal controls is and lack of segregation of duties.

A business is vulnerable to fraud both internally and externally. Many businesses are susceptible to fraud due to a misunderstanding of what a complete system of internal controls is, lack of segregation of duties, trusting of others, limited resources, and mismanagement. Both small and large organizations suffer losses from fraud; they just tend to differ on the type of loss. However, smaller organizations seem to suffer large loses because they tend to have more difficulty absorbing the loss due to fraud.

According to the Association of Certified Fraud Examiners’ (ACFE) 2014 Report to the Nations on Occupational Fraud and Abuse, a typical “organization loses 5 percent of revenues each year due to fraud … which translates to a potential projected global fraud loss of nearly $3.7 trillion.” For example, a business that generates $500,000 in annual revenues, a loss of 5 percent in revenues equals a loss of $25,000 in sales, this can be substantial to a business, and can mean the difference between staying in business or closing the doors.

Misappropriation of assets are noted as the most common types of fraud, as it occurs in almost 85 percent of cases in the report; corruption and financial statement fraud are the other top two types of fraud. This means, that in your business, the people who are entrusted to manage the assets of the business steal from it, this may involve employees or third parties in the organization who abuse their position to steal from it through some type of fraudulent activity. This can involve the theft of cash through skimming and billing schemes, employee theft of inventory and supplies, unauthorized use of equipment, fake sales and or purchases and security breaches.

To help you protect your organization, here are six tips to help safeguard the assets and resources of your business, and ways to mitigate and prevent instances of fraud.

Pre-screen employees: Through the new hire process, perform a background check, reference check and criminal check on all new hirers. Also consider incorporating a process that allows you to perform a routine check on your employees throughout their tenure with your company.
Security: With the advancements in technology and the growing dependency on technology for most businesses, having a secure system and framework is vital to your network and organization. Especially now that many administrative, operational and financial processes are conducted online. In this day in age, many retailers and non-retailers utilize some type of online payment system and storage system for important records and safekeeping that can be susceptible to fraud. And with the use of mobile devices for on-the-go e-commerce, businesses need to consider a well thought out plan and system to control security risk. This truly involves incorporating high level IT and security services beyond an anti-virus software to protect your organizations intelligence and financial data to avoid becoming the next major headline involving a security breach and possibly going out of business. In 2013, Target, experienced a breach that possibly caused as many as 42 million debit and credit card accounts to be hacked while a data breach at Home Depot, triggered fraudulent transactions across financial institutions.
Internal control process and procedures: Establish an effective internal control system to help play a role in detecting and preventing fraud in your organization. Developing a policies and procedures manual is one way to reduce fraud, because it involves a process to help you direct, monitor and measure those high risk areas surrounding cash receipts, cash disbursements, payroll, safeguarding machinery and equipment, and other functions. Examples may include, developing a fiscal policy, segregation of duties, reconciling accounts routinely, maintaining logs, maintaining physical and video security, and other steps to create a system of checks and balances.
Segregate duties and task: Create a formal policy of separation of duties, strict supervision, voucher accounting and a system of reconciling accounts and monitoring of processes. An example may be to require the bank reconciliation to be performed and reviewed by an independent person who doesn’t perform the day-to-day bookkeeping responsibilities. Segregating duties and tasks are an important internal control function that warrants emphasis.
Financial audit: Conducting an annual audit of the organization’s financial statement is another way to protect your business from fraud. In the wake of corporate scandals and fraud such as Enron and WorldCom, the Sarbanes-Oxley Act was created to help mandate public companies have an independent audit of internal controls over financial reporting. This has placed a great emphasis and spotlight on financial audits. As an auditor that performs these types of audits, I have seen the impact an audit has as a fraud deterrent when people know that an organization has an independent third party examine and assess the financial statements and internal controls over financial reporting. A financial audit is not limited to public companies that are traded on the stock exchange or government agencies as many small- to medium-sized businesses conduct annual financial audits, too.
Tip Hotline: Create a process that allows employees to tip you and help you identify and respond to fraud schemes early on. The ACFE report noted that more than 40 percent of all cases are reported through a tip, which was more than twice the rate of any other mechanism used to detect and deter fraud. This is a great way to prevent fraud, by training employees on fraud prevention, conducting targeted fraud awareness training and offering a hotline to report suspicious activity.

Managing fraud is a universal problem for all organizations, no matter the size or structure. A commitment to safeguarding the assets and resources of what you have worked hard to build, by incorporating a series of steps to protect your business from fraud makes good business sense. It is also key to create an environment within your organization that allows everyone to take responsibility and play a role in managing and protecting the organization from fraud.

Gerri Lazarre, CPA, MsTax is a certified public accountant and principal with TriMergeCPA and TriMergeTax in Miami, Florida. Lazarre specializes in providing professional advisory services in the areas of accounting, audit and tax planning to individuals, businesses and nonprofit organizations for more than 13 years. For more information, please visit www.TriMergeTax.com and www.TriMergeCPA.com. Connect with Gerri on social media at T witter.com/TriMergeCPA, T witter.com/TriMergeTax or https://twitter.com/GerriLazarreCPA.