Are you watching you company’s finances or are you trusting your employees to do it for you?
No matter how trustworthy you consider your bookkeeper or accounting staff, you must establish some system of checks and balances. Answer “yes” or “no” to the following questions to give you some idea of how vulnerable your company is to employee fraud.
1. Your bookkeeper has the authority to approve invoices for payment.
2. Your bookkeeper issues checks and reconciles your checking account.
3. You don’t have a policy to flag unusually high amounts on employee expense
reports.
4. You believe that your employees are honest and never conduct surprise audits.
5. Your employees would be uncomfortable reporting suspicious behavior.
The more “yes” answers you have to this quiz, the more likely you are to be victimized by one of the three most prevalent forms of employee fraud — misappropriation of assets, corruption, and financial statement fraud. While Enron, Worldcom, and other large corporations have received a great deal of publicity for financial statement fraud, in smaller companies the most frequent type of employee theft is misappropriation (payments to fictitious vendors, overpayment to vendors with kickbacks, or checks for unearned overtime).
How can you protect your business? There is no simple answer because each situation is different, but here are some internal control practices that can minimize the opportunities for employee fraud:
1. Separate responsibilities so that:
the person who opens mail with payments doesn’t record receipt of payments
the person who approves invoices doesn’t issue the checks
the person who issues the checks doesn’t open and reconcile the checking
statements
2. Have all financial transactions reviewed and approved by an appropriate
manager
3. Conduct surprise financial audits
4. Develop and enforce a code of ethics with appropriate penalties
5. Encourage employees to report suspicious behavior
6. Establish an anonymous employee hotline if possible
7. Create an atmosphere in which employees feel valued and fairly paid
Fraud can hit your company where it hurts the most — in the bottom line. So, if you don’t mind your business, someone else may do it for you.
