Small businesses are the most vulnerable to some form of employee fraud as they usually place trust in one or two people and therefore have fewer accounting and other internal controls.
The festive and holiday period is typically the time of year when many frauds occur as business owners often hand over control of various tasks to more junior or temporary staff and they become less careful about monitoring procedures.
Statistically the most likely person to commit a fraud such as embezzling money is a long standing and trusted employee.
Business owners can protect themselves by developing reliable accounting and other internal controls and constantly monitoring the effectiveness of these controls.
The most common frauds that are committed by employees including some appropriate controls that should be put in place include:
THEFT OF MONEY
Frauds that involve money can be very costly for small businesses and in some cases can lead to the closure of the business. Examples include stealing cheques sent by debtors directly from the mail, forging an endorsement on a cheque, stealing cash from the till, and falsifying signatories and amounts on cheques issued by the business.
Suggested Controls
* Separation and rotation of duties between cash/cheque handling, preparing the banking records and recording in the general ledger.
* Having at least two persons sign all cheques.
* Performing regular bank reconciliations.
* Regular observation of employees handling cash or receipting debtors.
* Issuing pre-numbered receipts for all monies collected and recorded in the debtors ledger. This notifies the customer that their money has been received and recorded.
* Daily banking of cash and cheques and prompt recording of transactions in the accounting records.
ELECTRONIC BANKING FRAUD
Electronic banking is used increasingly by businesses for payroll, supplier payments and transfers of funds between bank accounts. Whilst this is a more efficient way of dealing with these types of banking transactions business owners often fail to implement appropriate safeguards.
Banks will not reimburse businesses from losses arising out of electronic banking fraud where the business has contravened certain conditions (e.g. not keeping the password in a safe location).
Suggested Controls
* Having at least two persons approve all payments and transfers.
* Maintaining security over passwords (i.e. ensuring that they are input without others observing, are not written down and are changed regularly).
* Setting appropriate limits on the dollar value of transactions.
* Confirming security arrangements with the bank on a regular basis.
* Ensuring that bank authorities of terminated employees are removed immediately.
* Installing virus and firewall protection to reduce the risk of access by third parties.
* Ensuring that staff immediately delete any unsolicited or spam emails that request the banking details of the business.
PAYROLL FRAUD
This is common where employees are not paid the same amount each week (e.g. shift workers and temporary staff) and the amount paid is calculated on some factor such as the number of hours work units produced, or the volume of sales.
Common techniques include extending the number of hours worked and type of work done on time sheets, manipulating the clocking on and off times where a time clock is used and artificially increasing sales on which commissions are paid.
Other common payroll frauds include inserting ghost employees on the payroll and where employees lie about their experience and qualifications
Suggested Controls
* Review and authorisation of time sheets and clock on and off times by a supervisor and/or manager.
* Requiring all overtime to be authorised in writing beforehand.
* Separation and rotation of duties between employees paying wages and recording in the payroll ledger.
* Paying employees by cheque or direct deposit into specific accounts as this can be easily traced in the event that a fraud is uncovered.
* Obtain independent verification of the qualifications of employees, check their references and confirm their experience from previous employers.
* Conduct regular performance reviews personally on all employees that are listed on the payroll register.
THEFT OF STOCK
This fraud involves the theft of physical assets (e.g. stock and plant & equipment) from the business and usually occurs where there are large numbers of small inventory items. Examples include false write-off of stock in the accounting records, altering the stock-take records, and falsifying purchase orders or invoices to reflect the stock stolen.
Suggested Controls
* Limit access to stock and items of plant by physical security particularly after hours.
* Independent authorisation of stock write-offs or scrapping of inventory items.
* Purchase orders crosschecked to the invoice and appropriately authorised.
* Separation and rotation of duties in the ordering, receiving and recording areas.
* Conducting proper and regular stock takes using pre-numbered stock sheets.
BILLING SCHEMES
These schemes attack the payments system of the business and occur as most payments are made by cheque so there is limited scope to steal cash.
A typical billing scheme involves the person creating a false purchase invoice from a fictitious business, or an accomplice business and then having this false invoice approved and paid.
Suggested Controls
* Separation and rotation of duties between the person making the purchase orders and submitting the orders for payment, the person preparing the cheques and banking journals and the person recording the transactions in the accounting records.
* Invoices approved by one person and that person should not draw the cheques or have the authority to order goods or services.
* Using pre-approved suppliers limits the opportunity of using a fictitious business to conduct the fraud. Any invoice from a supplier that is not pre-approved should be verified before payment is made.
FALSE EXPENSE CLAIMS
These frauds involve the person inflating expense claims, making false or multiple claims for the one expense, or claiming a personal expense as a business expense. Whilst the amounts are usually so small to be noticed individually they should not be regarded as insignificant as they can have a large cumulative effect on the business.
Suggested Controls
* Require employees to submit detailed expense reimbursement requests including original receipts and supporting documentation and provide proof that the claim is for business purposes.
* Authorisation of expenditure reimbursements claims by the employee's supervisor or manager before it is submitted for reimbursement.
* Randomly checking expenditure directly with the supplier and verifying the invoice and payment.
Joe Kaleb is a chartered accountant in Australia and CEO of http://www.australianbiz.com.au a website that provides tax, management tools and other services to small business owners.