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Tough Times Series: Guard Your Small Business Against FraudCasey Mysliwy
The economic recession may not be the only thing posing a danger to your small business.
According to a 2009 Wall Street Journal report, economic downturns can lead to increased employee fraud as more workers struggle to make ends meet. Small businesses often are most exposed to this type of fraud because they tend to lack the proper internal controls to prevent it, according to the report.
However, you can take measures to protect your small business. This means making sure you equip your business with the internal controls that many small businesses miss.
According to Neil Lerner, director of the University of Wisconsin-Madison Small Business Development Center, owners should have standard procedures for all financial activity that occurs within the business. "Make sure all employees understand what the [procedures] are," Lerner says. "You want to have some policies in regard to how cash is handled and who handles it, but then [also] what the expectations are in terms of it being deposited and in terms of payments being sent out."
The California Society of CPAs also recommends these business steps to prevent fraud:
- Password-protect laptops and encrypt sensitive files.
If you suspect fraud, get a qualified attorney to help you figure the situation out and prevent legal entanglements with the employee.
- Protect passwords at work—don't write them down and leave them on your desk.
- Protect statements that contain account numbers.
- Conduct thorough background checks on applicants during the hiring process, especially before granting employees access to sensitive information or purchasing authorization.
- Segregate duties so that no employee is responsible for both recording and processing a transaction:
- Set limits to the number of people who can authorize purchases and set monetary limits on the amount each person can authorize.
- Make sure that the person who keeps the books is not the person who reconciles the statements.
- Make sure that the person who opens the mail and prepares deposit tickets is not the person who keeps the books.
- Run random audits or have a third party audit your books once a year, in particular for bookkeepers or employees who have access to financial records and documents.
- Use a "for deposit only" stamp on all incoming checks to prevent an employee from cashing them.
Make sure all employees understand what the procedures are.
- Sign every payroll check personally and avoid using a signature stamp.
Lerner also suggests enlisting your accountant's help to evaluate current practices. "A good accountant can give recommendations on how to improve business performance," Lerner explains. "Have your accounting firm more involved periodically to review internal controls, review documents to see if they suspect anything irregular, and help you perform audits."
If you suspect fraud, Lerner warns against confronting an employee directly. "Get a qualified attorney to help you figure the situation out and also do it in a way that would prevent legal entanglements with the employee," he says.
With the right protections in place, and the right experts in your corner, your small business can remain safe and sound. Consult with business specialists at your credit union for more help with handling your small-business finances.