The Bulletin
Technical Tips
By Tom Snyder Ph.D.

Fraud doesn’t affect just the Enron’s of the world. It affects growing businesses, and in some ways, they may be more vulnerable than larger organizations. The trusting, familial characteristics that make a growing business a pleasant place to work, sometimes contribute to an environment conducive to fraud. I know several organizations that have suffered from fraud in the last year and according to the Association of Fraud Examiners, "The typical U.S. organization loses 6 percent of its annual revenues to fraud”.

So, who is embezzling all of that money?

"The largest percentage of fraud is perpetrated by people in a position of trust, and accountants make up a large percentage of the perpetrators," says Sergeant Kevin Rowe, of the Albuquerque Police Department's White Collar Crime Unit. "They know the books. The owner is busy doing the marketing and other things, and that trust is abused."

According to accountants, the best way to prevent fraud is to create and enforce effective controls in all areas of potential exposure. The following are eight steps to get you started.

1. Hire right

Prevention is always better than a cure. Be sure to screen potential employees, contractors and consultants thoroughly, checking past employment, personal and professional references, and criminal records. This is especially important if the person will handle cash or inventory.

2. Separate accounting duties

Many small firms depend on one person to open mail, process payments, make bank deposits, pay invoices, handle petty cash, and reconcile bank statements. This unrestricted access makes an organization vulnerable. Certified Public Accountants (CPAs) say it's a good idea to divide accounting responsibilities so that no single individual controls all of the financial activity. They also
recommend making it a priority to actively understand and verify your business's financial information.

3. Have bank statements mailed to your home or a post office box

Review bank statements before your bookkeeper does. Be on the lookout for missing checks, checks that are out of order, checks written to suppliers or people you don't know, and checks made out to a third party but endorsed by someone in your company.

4. Arrange for regular, surprise audits

Catching people off-guard can be your best defense in discovering fraud. Make it a practice to bring in a third party once a year, at different times, to conduct an audit of your company's financial records. This makes it difficult for a dishonest team member to cover up his or her actions. In addition to uncovering fraud, the knowledge that the company conducts surprise audits can act as a deterrent.

5. Create an ethical work environment and a no-tolerance culture

Set appropriate ethical examples for team members to follow and treat them fairly and with respect. But don't be too trusting -- keep in mind that personal financial pressures can push even the most trusted people to conduct fraud. Through orientation, training, and other communications make everyone aware of what activities constitute fraud, what the consequences are, and what steps the firm takes to detect fraud. You should also ask team members to let owners or managers know if they suspect fraud.

6. Insist that all employees take allotted vacation time

Research has shown that employees who are committing fraud sometimes resist taking a vacation because they must remain on the job to cover up their fraudulent activity. For some employees, just knowing they must take a vacation every year is enough of a deterrent.

7. Use streamlined, systematized accounting practices

Replace different, disconnected, possibly spreadsheet-based accounting processes with standard ones supported by more sophisticated, integrated accounting applications. This helps reduce errors, create an audit trail, enforce separation of duties and payment authorizations as well as allow owners and
managers to more easily understand and verify their financial information.

8. Don't limit your focus to financial fraud

Theft of confidential customer information and trade secrets can be just as damaging to your business as embezzling funds. Enforce strict procedures for access to sensitive data. For example, store confidential customer and trade secret paper files in locked cabinets and provide keys only to those who need this information to do their work. “Tag” electronic versions of confidential customer and trade secret information so you can tell if it has been stolen. Add language to contracts and email so co-workers understand your requirements for protecting sensitive information they may see or you may share. Buy a paper shredder and use it to destroy all confidential paper documents that you no longer need. Be sure to “wipe” the storage area of electronic devices you give to
someone else. For additional risks to watch out for as well as mitigation procedures, feel free to contact me at 866.926.8746 or contactus@xantrion.com.

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If you have questions or concerns about your particular situation, please e-mail me at tpsynder@xantrion.com.. I will use your input to direct future columns.
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