Fighting Fraud

The link between fraud and economic downturn is both intuitive and well documented.  By the middle of 2009, the Association of Certified Fraud Examiners indicated more than half of their members had seen a rise in fraud in the past year. Almost 90% of the membership expect a rise in scams and schemes in the coming months. The Fraud Examiners also highlighted that small businesses are most at risk for fraud.  The logic behind this is that the level of fraud prevention in a small business tends to be low.  The small business owner has too much to do and not enough time to get it done.  In addition to that real obstacle, there are 2 popular myths that limit fraud prevention for a small business: 

(1)  it won’t happen to my business and

(2)  anti-fraud activities don’t work reliably, so why bother. 

While it’s true there’s no guarantee of  fraud elimination – consistent and easy steps do have a  big impact on protecting your business. 

My Five Step Business Protection Plan starts with the famous (infamous?) fraud triangle.

You can’t control the base here-- motive and rationalization.  Reducing opportunity is where you stop fraud cold. 

 Five Step Business Protection Plan

 1.  Have a plan.  Having a plan means you thoughtfully and consistently allocate resources to this issue.  Fraud control works if you do it. 

2.  The way to catch both legitimate errors and dishonest bookkeeping is  a technique called “Segregation of Duties”.  In it’s simplest form this means the same person should not  conduct the following activities in a transaction:

*  Authorization

*  Custody

*  Record Keeping

*  Reconciliation

If you can’t afford an employee for each category, then designate someone to check the work. (It’s not that collusion can’t happen when you use this method, but it’s far less common than single operator fraud.)

3.    Be inconsistent in how you check for fraud.  I know we just discussed the value of consistency, and yes having a set of procedures that you implement relentlessly is important.  That doesn’t mean though, that you check on how those procedures are working in an equally systematic way.  You should check, and you should do so regularly.  What and how you check should be guess work for a potential fraudster.  Again, this catches errors unexpectedly as well as a thief.

4.    Make sure you consider how technology both helps and hinders the cause of honest work.  The popular small business program QuickBooks can assist the owner in catching fraud as well as enable a thief.  Use of the audit trail, occasional changes to who-does-what-tasks in QuickBooks, and knowledge of the program’s blind spots are all important components of an anti-fraud plan.

5.    Last but not least --  Make sure conversations about fraud prevention occur often and on an ongoing basis.  Again there's a double benefit of moving the rationalization component of the triangle a out of kilter, and it recruits like minded employees to be vigilant for fraud.