Internal Controls: 10 Ways to Prevent Fraud
It can start in subtle, easy-to-dismiss ways. An accounting employee who fidgets a little and won’t make eye contact during financial presentations. A long-time customer who has started using multiple credit cards to complete large purchases. A physical inventory count that doesn’t match your records correctly.
Maybe the employee has a medical or other personal problem. Perhaps the customer is trying not to max out any one card. And that missing inventory? Probably someone just miscounted or failed to record returned, unusable merchandise.
Or maybe your company is the victim of fraud, either from within or an external source. If it’s happened to you, you’ve undoubtedly strengthened your internal controls. If it hasn’t, know that it can, and take steps to try to prevent it.
A Serious Global Problem
In its 2014 Global Fraud Study, the Association of Certified Fraud Examiners (ACFE) reported that, “…the typical organization loses 5% of revenues each year to fraud.” The median loss was $145,000, and in 22 percent of the cases, at least one million dollars was lost.
The most common detection method? A tip hotline. Tips – nearly half of which came from employees – accounted for over 40 percent of all cases.
Think your company is too small to warrant some kind of communication pipeline for anonymous tips? That’s what a lot of small businesses think. And that’s exactly why they’re more likely to be victims of fraud than big businesses. They simply don’t anticipate it ever happening, so they neglect to take fraud-detection measures.
Common Sense Safeguards
You don’t need to pay for a security expert to come in and make recommendations. Some of the preventive steps you can take are simply smart business practices.
For example, safe hiring procedures. You may feel that background checks are too intrusive, and you don’t want to offend new hires. An official background check – fingerprints and all – is less intrusive, though, than laying off part of your staff because you suffered a major financial loss due to fraudulent activity.
Background checks are becoming more commonplace. If you do start requiring them of every new hire, you’re probably going to want to ask current employees to submit to them, too.
Include fraud awareness in appropriate discussions or emails about policy. And be sure to include a section on the topic in your employee handbook.
Protect Your Financial Framework
If you absolutely can’t ask everyone to go through a background check, at least make them mandatory for anyone who deals with your company’s finances.
Other ways to protect your money include:
- An approval process for expenses – at least those over a specified dollar amount.
- Unannounced mini-audits.
- Accounting software that offers a bulletproof audit trail and reports that can uncover fraud. The application should also let your administrator determine which areas each user can access, and who is allowed to actually enter data.
If you’re still managing your company’s finances on paper, or even paper and Excel, fraud prevention will be an even greater challenge. You’d be wise to work with a financial advisor to make the transition to software or a cloud-based solution. If you’re already using an application for bookkeeping, an accounting professional can advise you on additional security measures.
In its report, the ACFE reported that many months typically elapse before fraud is detected. The median time was 18 months. And even when it’s discovered, more times than not, the company does not recoup all that was stolen. 58 percent of the victims surveyed didn’t recover anything. Only 14 percent got everything back.
There are so many steps that you can take to keep from being part of a statistic in the ACFE’s next survey. Security industry experts advise businesses on the obvious – use AVS verification when accepting credit cards, install state-of-the-art computer and network security tools, etc. – and the not-so-commonplace, like mandating that all employees take their allotted vacation days (some offenders prefer to stay at work to keep from being discovered).
Some employees may take offense at your fraud-related safeguards. Don’t let that deter you. Remind them that you’re simply implementing standard business practices, and that you’re actually trying to protect their jobs — and your company’s future.