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Taking the Necessary Steps to Avoid Fraud

(February 2011) posted on Thu Feb 03, 2011

Ways to recognize signs of fraud and how to stop it from occuring.

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Pressure to commit fraud, as I mentioned before, comes from an individual’s personal financial circumstances, which may be very difficult to manage as an employer. But there are some practices that can help. Cultivating an “open-door” policy within your business can often serve as assistance to an employee with financial problems. If an employee feels comfortable discussing with the company’s management personnel some financial struggles they might be having at home, it will at least allow you a chance to help them alleviate some of the “pressure” they are experiencing. Formal policies such as payroll advances or employee loan programs can also provide a struggling employee with options other than eventually committing fraudulent activities.

Controlling the opportunity for fraud is the best way for your business to prevent it, and is accomplished through the separation of duties. This practice becomes much easier the larger your financial or accounting department is. For a smaller business with only one bookkeeper or accountant, it’s challenging, but not impossible. For example, no organization, small or large, should have the same person recording bills, paying the bills, and reconciling the bank statements, and certainly not signing the checks. Even with one accountant, you can implement a policy in which someone else in management is reviewing the check run and signing checks, paying attention to any missing sequences of checks, physically verifying voided checks, and questioning payments to vendors or subcontractors that you don’t recognize.

If you only have one accountant and you don’t have anyone else inclined to reconcile your bank statement, you may want to consider paying outside accountants to do that each month as a control measure. As you add accounting personnel, you have a better opportunity to mitigate the risk of fraud by having different people completing various accounting responsibilities such as dispensing petty cash, receiving payments from customers, and other responsibilities that grant access to cash.

Take the necessary steps now
Regardless of how big or small your company is, make a decision now to establish practices to help prevent fraud. Fraud rarely begins with a bold, dramatic act of stealing a significant amount of money. It begins with someone feeling some financial pressure, rationalizing their behavior, and taking advantage of an opportunity to steal a seemingly insignificant amount of money from your company. From there, the problem inevitably grows with time. Take the necessary steps to avoid fraud in your business and you may very well avoid what could be a very ugly situation. Establishing controls in your business doesn’t represent mistrust in your employees. It represents good, smart business practice.