Ensure controls are in place to stop fraud

posted in: HR Advice | 0

Fraud happens, and it can hit businesses hard.

The Association of Certified Fraud Examiners reports that organizations worldwide lose about 5 percent of their annual revenue to fraud. That loss can be particularly harmful to small-business owners, as the median cost
of a case of fraud was $150,000, according to ACFE’s 2016 report on fraud.

Furthermore, fraud can cause small-business owners to attribute cash-flow problems to other sources, such as a downturn in the economy, and force them to lay off employees, cut back on employee work hours, or reduce employee benefits.

Businesses that don’t have fraud prevention methods in place are more likely to pay the cost with two times the amount being taken. ACFE’s report indicates the top three types of fraud in the workplace are asset misappropriation, such as billing or check schemes, corruption, and, the most popular, financial statement fraud. Within small businesses, fraud tends to center around check tampering, skimming and payroll and cash larceny, according to the report.

Small businesses are even more vulnerable because one person is often charged with accounting, payroll and human resources duties. Small businesses also have that “trusted employee” mentality or are run by families, and there’s an extra element of built-in trust that the person would do no wrong, according to ACFE.

That’s why checks need to be put in place regardless of the size of a business.

There are several steps that can be taken:

First, set up an employee ethics code and ensure all employees know and understand it. Conduct background checks on all employees, which might discourage thieves from applying.

To avoid payroll fraud, control who has access to certain information and the ability to set up controls and processes, according to Patriot Software, a company that creates custom software solutions for small business owners.

Next, create a series of checks and balances so there is a separation between human resources and payroll, and that there are separate people who onboard a new hire, process payroll and handle quarter-end reconciliations and canceled checks, the company suggests. If possible, don’t allow payroll employees to process their own checks.

Another way to provide controls is to rotate responsibilities within the department. If the business is too small to do this, the owner should ensure all payroll tax deposits are made and take a quarterly look at all payroll and any new hires to ensure the information reconciles and is accurate. A business also should have routine, as well as surprise, audits conducted. ♦

Leave a Reply