Elizabeth Wasserman

How to Protect Your Business Against Fraud

 

How to Protect Your Business against Fraud: Creating Checks and Balances

Internal controls are one of the great fraud deterrents. Internal controls involve the processes by which a business operates and goals are achieved. In accounting, it refers to the reliability of financial reporting and compliance with laws and regulations. Setting up good controls is important for a business to detect and deter fraud.

'A lot of organizations have an internal audit department, but small organizations can't always afford that luxury,' Bachman says. 'But they do have accountants and other people in charge of keeping track of accounts.' However, small businesses may have some weaknesses in terms of controls, such as putting the same employee in charge of making deposits and reconciling bank statements. Allowing one employee/department to perform multiple critical functions is inconsistent with preventing fraud. By dividing the responsibility of certain functions, a system of checks and balances is created and this creates an environment where fraud is less likely to occur. Lougovskaia says businesses should consider the following examples to establish better checks and balances:

  • Separate the person/department writing the checks from the person/department that reconciles the bank statement.
  • Do not let the person initiating a purchase order approve the payment regardless of position within the company.
  • Separate the functions of creating databases, maintaining databases and using the data.  For example, the person responsible for generating payroll checks should not be entering employee data.
  • Require separate confirmation and storage of inventory records away from the location of the inventory and rotate responsibility for taking inventory.
  • Assign administrative access to the business data, web site, intranets, and email accounts to different individuals. 

Implementing a fraud prevention plan requires commitment and also requires the business to provide the right tools and support to its employees. Businesses are better off if they build in deterrents, establish good controls, and provide oversight. It's also important to encourage employees to have a conscientious attitude, says Bachman, such as: 'Our business' survival depends on employees being honest.'

Dig Deeper: How to Set Up Accounts Payable

Recommended Resources
Ten Ways to Prevent Identity Theft from Staples.com
http://www.staples.com/sbd/content/article/i-n/identitytheft.html

The FBI's List of Common Fraud Schemes:
http://www.fbi.gov/majcases/fraud/fraudschemes.htm

Understanding and Detecting Fraud by the Department of Justice
http://www.usdoj.gov/usao/eousa/ole/video_info/ubf_part1.pdf

The United States Treasury's Financial Crimes Division
http://www.ustreas.gov/usss/financial_crimes.shtml

The United States Post Office Mail Fraud Unit
http://www.usps.com/postalinspectors/fraud/welcome.htm

PriceWaterhouseCoopers 2009 Global Economic Crime Survey
http://www.pwc.com/gx/en/economic-crime-survey/index.jhtml

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Elizabeth Wasserman is editor of Inc.'s technology website, IncTechnology.com. Based in the Washington, D.C. area, she has more than 15 years experience writing about business, technology, and politics for newspapers, magazines and websites. Her work has appeared in such publications as Congressional Quarterly, Business Week, Portfolio and Slate.