John Medovich, CPA
 

Fraud Prevention Checklist

Each year many business owners discover that their assets are not as well protected as they thought when they become victims to employee theft.  This is particularly true in small business environments where a single employee manages all the finances.  Often there are no "checks and balances" to verify that transactions are accurate.  Most employee thefts are perpetrated by highly trusted employees in key positions, involving substantial sums of money.

When proper, consistent procedures are not in place, employees can learn to manipulate the accounting system to their benefit.  Whether they take money from the company or their mistakes are undiscovered, the end result can greatly impact your company's management decisions, financial reports, and tax filings.

The odds are that you will probably never experience a major defalcation.  Yet, statistics are high that at least one of our clients will be victimized every few years.

Therefore, the best way to safeguard your company's assets is to recognize and improve weaknesses in your internal control procedure.  Defalcations are more likely to be discovered when there is an appropriate separation of duties between asset handling and recording functions.  It is also critical that you exercise managerial oversight.

The following practices can help you to minimize potential internal control problems:

     RELATED DUTIES SHOULD BE ASSIGNED TO DIFFERENT PEOPLE.

     Certain accounting functions are designed to cross-reference each other for    accuracy;  writing/signing checks, ordering/paying/receiving materials,handling cash/recording cash, etc. These procedures can reveal inconsistencies in your records in a timely manner.

     RECONCILE AND SCRUTINIZE YOUR BANK STATEMENTS EVERY MONTH.

     A bank statement can tell you a lot about your business if you review the information in a timely manner.  Actions you should take on a monthly basis include the following:

  1. Receive the unopened bank statement and open it personally.
  2. Scan the front and back of all cancelled checks.
  3. Question the purpose of all transfers.
  4. Compare payroll checks with employee records and ask questions.

     SIGNING CHECKS.

  1. Never sign a check without inspecting original supporting documentation including the invoice, shipping documents, and the purchase order.
  2. Cancel all supporting documentation after signing the check.
  3. Never sign a check that is not completely filled in.
  4. Verify the names of your vendors.

     PROTECTION OF VALUABLES.

  1. Keep blank checks and the signature stamp secure.
  2. Deposit all cash and checks daily.
  3. Get fidelity bond insurance for all accounting and key employees.
  4. Backup all computer files on a regular basis and store the backup at a secure, remote location.
  5. Periodically change computer system passwords.

     WATCH OUT FOR CHANGES IN EMPLOYEE BEHAVIOR.

  1. Always verify employee references before hiring.
  2. Be aware of substance abuse, changes in lifestyle, living beyond means, possessiveness of work.

These are some of the internal controls that can help you reveal many discrepancies. Our firm can help you to develop and implement any of these important internal controls.  If you have any questions, we would be happy to assist you in any way we can.