Guest Contributor Kelly Wessel is the founder and CEO of Wessel Accounting. A Furman graduate with a bachelor’s in business administration, Wessel is a Certified Internal Auditor (CIA) and a Certified Fraud Examiner (CFE), as well as a Certified Identity Theft Risk Manager (CITRM) and a Certified QuickBooks ProAdvisor (2010), and has successfully completed testing to obtain a Certificate in Forensic Accounting (CertFA).
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You may not have to look beyond your trusted employees to find security threats
We are hearing a lot lately about internet security, online fraud and identity theft, but what about the fraud that is much closer to home and much more prevalent?
That is fraud taking place internally and often perpetrated by trusted employees. You read about it all the time in the news and – most certainly – think it can’t happen to you.
But, in fact, small businesses, startups and fast-growing businesses can be the most vulnerable and the least able to ride out the financial and legal impact of fraud.
Almost every business is at some risk for fraud – often from within its own ranks.
Why are fast-growing businesses and startups most at risk?
One of the best ways to find fraud is through anomalies, but the fast-growing business may not be able to compare year-over-year results each quarter due to big revenue increases. If your company makes $10,000 more this month than last year, you might not stop to ask, “Shouldn’t that be $12,000?”
Startup businesses are often running on a shoestring – a couple of entrepreneurs who are experts in their fields but not so much in accounting, auditing or the importance of internal controls. You may be more likely to simply rely fully on an employee to “do the right thing” without questioning what is being done. After all, if you wanted to be that deep in the weeds on your numbers, you would have been an accountant, right?
Small businesses in general often keep staffing tight, relying on willing, motivated employees who often volunteer to take on new assignments. Having one person – no matter how trusted – doing multiple jobs can put your company at much greater risk of fraud.
Most people are trustworthy, but external factors can combine with opportunity to turn good employees intro fraudsters. Personal finances, addictions, family crises are all potential motivators.
How can you tell if something’s going on? Monitored internal controls are the best way to prevent or detect potential fraud. But there are some basic red flags to be aware of:
1. Do you have one or two people with multiple functions? Willing employees who say they’ll stop at the post office and pick up the mail on the way in, and swing by the bank with a deposit on their way home? Do they also have access to check stock? A division of responsibilities is an important control.
2. Do you take time to closely review your bank reconciliations each month? Although this seems tedious, it is an important control to make sure you know what money is being recorded, and what payments are going out. If you as the owner don’t have time to do this, it can be someone else who is trusted in your management but who has no fundamental financial responsibilities.
3. Do you review cash register reports? In retail businesses, check those reports daily looking for multiple voids. That can be a red flag.
4. Do you have employees who never take real vacations? They are never out for more than a day or two at a time. You think of them as hard-working and they probably are, but sometimes they are making sure that their work will never have to be done by someone else, who might uncover some inconsistencies. Banking institutions may require employees take vacations for exactly this reason.
5. Do you have IT controls? Password policies? An exit procedure for separating employees? Can you say with certainty that the last employee you fired doesn’t still have an active door code or password?
Most small businesses have vulnerabilities and many aren’t able to maintain the separation of duties that auditors look for. In those cases, owners must be even more diligent about developing a set of workable procedures and monitoring them monthly.
