Seven Warning Signs of Fraud

According to recent reports by the Association of Certified Fraud Examiners (ACFE), an estimated 5% of revenue is lost to fraud and embezzlement every year. Surprisingly, small companies with fewer than 100 employees appear to be more at risk than the corporate heavyweights. The ACFE says that the median loss for businesses with fewer than 100 employees ($147,000) was greater than that for businesses with 10,000 or more employees ($140,000).

The best approach for a small-business owner is to be proactive. By taking steps to thwart fraud, you may be able to avoid the common pitfalls that plague numerous other employers.

Typically, fraud occurs when sufficient internal controls are lacking or inadequate. Here are seven red flags that deserve your immediate attention.

  1. No segregation of duties: It is important that the employee who authorizes actions (e.g., payments of invoices) is not the same person responsible for completing those actions (e.g., payment of checks). Those duties should be divided up and assigned separately. Also, a third party should maintain custody of the cash account. In all cases, rely only on the most trustworthy employees.
  2. Lack of physical safeguards: Start with simple precautions such as sticking ID tags on computers or attaching expensive equipment so it cannot be moved easily. Always secure safes and other valuable data and records. Keep office doors locked after hours, and limit access to sensitive areas when possible.
  3. Inadequate documentation: For fraud to be exposed and then proven, you must keep adequate records. For example, if proper accounting procedures are not put in place to cover cash disbursements, it will be difficult, if not impossible, to detect instances of abuse.
  4. Unusual cash transactions: Any significant differences between cash expectations and actual receipts should be studied carefully. Do not wait to investigate if a pattern seems to be emerging. There have been numerous cases of employees embezzling funds by writing checks to themselves and signing the employer’s name.
  5. Suspect source documentation: Be wary of suspicious-looking documents such as invoices, purchase orders, checks, expense reports, time cards and the like. In some companies, the criminals may even arrange for fake employees to be paid salaries. Make sure that payment procedures are carefully followed.
  6. Unreasonably high costs: It is not unusual for rising prices to occur due to inflation or other factors, but any increases should stay in line with industry standards. A classic example of fraud involves a kickback from a vendor or supplier.
  7. Travel reimbursements: This is another area that is often ripe for abuse. It is easy for an employee to falsify these records if no one is paying close attention. Make sure that receipts coincide with all aspects of travel expense reports.

Bring others on your management team into the loop. Detecting fraud should not fall to just one person. All company supervisors should be on the lookout for potential problems.