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Is your business being defrauded?

If you are like most small business owners, you haven't thought much about business fraud. But did you know that 35 percent of business failures in United States are caused by fraud artists who have managed to chip away a company's bottom line? Or that an estimated 25 percent of companies will be defrauded at some point, with small firms being particularly vulnerable? Or that perhaps 75 percent of business fraud goes undetected?

Business fraud can take many forms. Employees may falsify expense reports or submit doctored receipts to petty cash for reimbursement. A bookkeeper in accounts payable may submit invoices from non-existent suppliers and pocket the payments.

Suppliers may submit invoices for goods you never ordered. Customers may refuse to pay invoices, claiming not to have received goods, although they have. The competition may obtain information about, and even steal, your customers through collusion with an employee.

To prevent fraud at your company, begin by being aware that it can happen. Then take the time to check - or set up - internal controls. Follow up and be aware of circumstances in which you could be defrauded. For instance, the bookkeeper who handles the banking procedures is placed in a position of trust, and should therefore be checked periodically. For example, tell the bookkeeper that, each month, you want to quickly look at the bank reconciliations with supporting bank documentation. Check that your deposit slips match the bank's record of deposits, that records of withdrawals match, and so on. Once you're in the habit, this particular review should only take a few minutes each month. And, once your employees know that you're in the habit of reviewing their work, the opportunity for fraud is diminished.

If one person in your company handles accounts receivable and accounts payable, you are more likely to be at risk because there is no segregation of the duties. If there are outstanding accounts receivable, check up on a few occasionally, perhaps calling the customer yourself. It won't take much time. This can be particularly important in a recession. You may assume that your cash flow problems, for example, are due to your customers' financial troubles. In fact, the real cause might be an employee's financial troubles.

If you suspect that an employee is committing fraud, carry out a quick (and quiet!) check on your own, bearing in mind that too much digging may tip your hand and the perpetrator may destroy crucial evidence. Under the circumstances, it may be advisable to seek professional help.

If the professional's review confirms fraud, the professional will give you advice on the appropriate course of action. You can try to recover the stolen funds through a civil or criminal action. Or, perhaps your insurance covers amounts lost due to fraud. In some cases, it simply might be enough to have your employee sign a legal document promising to repay the stolen funds.

For CA's advice on TV - see Your Wealth, available on broadcast channels in Ontario and on satellite across Canada, or see Money in the Bank, on your community cable channel.

Moneycare is general financial advice by Canada's chartered accountants. Hazel de Burgh is an associate in The Forensic & Investigative Accounting Practice of Lindquist Avey Macdonald Baskerville.
COPYRIGHT 1992 Canadian Institute of Management
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1992 Gale, Cengage Learning. All rights reserved.

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Author:de Burgh, Hazel
Publication:Canadian Manager
Date:Jun 22, 1992
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