SmallBizLady: Why is small business susceptible to fraud?
Tiffany Couch: Often with limited resources, small business owners are relieved to find seemingly trustworthy and competent accountants or bookkeepers to handle the money and pay bills. Because of their trustworthy nature and the fact that business owners are so busy with other aspects, that accountant/bookkeeper often has little to no oversight over their work. Allowing for fraud to go on, unnoticed.
SmallBizLady: What are the biggest red flags of fraud?
Tiffany Couch: Four of the biggest red flags of fraud are:
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- Employee lives beyond their means; their lifestyle doesn’t make sense.
- They work when others are not present (first to work, last to leave).
- They act “offended” when you ask questions.
- They won’t provide basic financial information.
SmallBizLady: Who are the typical perpetrators?
Tiffany Couch: The typical perpetrators are people with access to your money (incoming deposits, credit cards, payroll, banking, etc.) or inventory. They are typically the most well-liked and trusted individuals in the organization!
SmallBizLady: Why do people commit internal fraud?
Tiffany Couch: The short answer for why do people commit internal fraud is because they can. They may initially have a pressure, like an unpaid bill, a sick parent, etc. They may also feel underappreciated/underpaid.
SmallBizLady: What are the most common schemes?
Tiffany Couch: Four of the most common fraud schemes are:
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- Diversion of incoming deposits (cash, checks, electronic payments, etc.)
- Unauthorized use of your checking account or debit cards
- Unauthorized use of credit cards
- Overpayment of payroll
SmallBizLady: What kind of losses do most small businesses suffer? It can’t be that much, can it?
Tiffany Couch: Small businesses are most at risk for fraud, and their average losses are in excess of $200,000 in a small business with 100 employees or less!
SmallBizLady: What are the ways I can protect my company from fraud?
Tiffany Couch: Strategies for protecting your small business from fraud include:
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- Segregate Duties: The person billing customers or clients should not also be able to prepare deposits and take them to the bank. The person accepting customer payments should not be able to post a write-off or credit to a customer account. The person preparing checks for payment should not be reviewing the bank statement and reconciling the account.
- Review Your Statements: Bank statements and cancelled check images should be looked at each month to make sure your deposits reflect your expectations and to ensure no unauthorized use of debit cards, electronic payments, or checks. Review credit card statements in detail. And review payroll after it has been processed.
- Have an Open Door Policy: The number one way fraud is uncovered is by “tip”. Whistleblowers are typically scared to come forward if they think you like the fraudster better than you like them. Don’t play favourites and let people know that if they see something, to say something.
SmallBizLady: Why don’t auditors or tax preparers find fraud?
Tiffany Couch: Audits are not designed to detect fraud. Auditors do not “look at everything” and are actually limited by looking at random samples of transactions. Due to the fact that they have “materiality” thresholds, often looking at transactions much greater than typical frauds.
Tax preparers are typically looking at completed financials and do not go back and look at details.
Auditors and tax preparers are nice people. They are rule followers and as such, have a mindset that other people wouldn’t commit fraud. Fraudsters appear to be nice people and trustworthy. Fraudsters are counting on the fact that they are trustworthy and honest people to explain things away not only to you but to the accountants, too!
SmallBizLady: What other ways of protecting your small business from fraud?
Tiffany Couch: Some other strategies for protecting your small business from fraud are:
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- Make sure you have six figures of employee dishonesty insurance.
- Insist that all employees, especially those with accounting responsibility, take at least one week of vacation each year and that someone is cross-trained to do their job in their absence.
- Ask questions – the perception of detection is a key deterrent!
SmallBizLady: What if you feel you have the best employees. Do you still need to worry about fraud?
Tiffany Couch: The mindset that “it can’t happen here” is often my clients’ biggest downfall. A healthy level of skepticism coupled with appropriate internal controls and/or oversight can greatly reduce your risk!
SmallBizLady: What are the best next steps for small business owners who think they may have a problem?
Tiffany Couch: First, take a deep breath – it’s going to be okay! Next, remove that person’s physical access to your building and to your computers as well (including remote access!), and secure key documents and segregate the person’s computer. Finally, call your insurance agent to determine your level of coverage and whether your policy covers professional fees, and call a professional to investigate!
SmallBizLady: Small business owners may be embarrassed that it happened. Should they just let the person move along?
Tiffany Couch: First, feelings of embarrassment, anger or shame are totally normal and to be expected. You are not alone, as all of my clients have similar reactions. In my experience, many of these people are known to have perpetrated similar crimes or go on to do them to someone else. I will also tell you that investigating and knowing what happened, how it happened, and how much was lost will often give you the clarity needed to make a more informed decision, rather one made out of those initial emotional reactions.
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