With year-end close upon us, many business owners are anxious to see final profit numbers. While it’s likely you have a good idea of what to expect from the previous year’s performance, sometimes there are unwelcomed surprises and questions that can arise as a result of preparing financial statements, reviewing results and looking more closely at cash flow.
How can income be down when sales were up so much last year? Why doesn’t our cash flow seem to match the increase in our operating results? Why are our expenses up so much over budget?
The good news is that fraud can be detected by digging deeper to answer these questions. The bad news is that frauds often go on for more than five years before they are finally uncovered. Why? In my experience as a Certified Fraud Examiner (CFE), I’ve seen it in nearly every case I’ve been involved in. It starts out so small that it can easily go unnoticed. A shortage of cash or extra expenses might just be “timing” or “bookkeeping errors” that will work their way out when the books are adjusted at year end close.
As they grow more confident, a hardworking fraudster can easily divert $50k to $100k per year before the scheme is uncovered. If gone undetected for several years, damages can be significant.
But this does not need to be the case. In fact, implementation of these three simple tips would put most of the fraudsters I see out of business years earlier.
- Review Your Monthly Bank Statements. Bank statements should be opened or accessed online by the owner or a key employee without a bank access. You should review the monthly activity, paying extra attention to cancelled checks and electronic transactions. Ask a few questions each month and initial the printouts or paper statements so your employees know you are reviewing them.
- Implement a Fraud Hotline and Code of Conduct. A hotline does not need to be complex. Simply posting a notice in the lunchroom telling employees how to report suspected fraud can be very effective. This sends a message that the company is ethical and does not tolerate fraud of any kind. Requiring employees to sign a Code of Conduct stating that he or she is responsible to report suspicious activity also helps to support the “tone from the top.”
- Cross-Train Employees. Cross-train several employees to do tasks that pose a high risk of fraud to the company (i.e. bank reconciliations, payroll, and check disbursements). Require employees with access to company funds or other assets to take regular vacations and have the cross-trained employee perform their duties while they are away.
Although these three controls may seem very simple, they are extremely effective. By actively devoting a small amount of time to each, you’ll be better positioned to guard your company against most of the frauds we see on a daily basis.
Want to know more about how RKL can help you prevent or investigate potential fraud in your business? Contact Bethany A. Novis, CPA/ABV, CVA, CFE, at (717) 394-5666 or email@example.com.
Contributed by Bethany A. Novis, partner in RKL’s Business Consulting Group and managing partner of RKL’s Lancaster office. Bethany specializes in fraud investigation, business valuation and litigation services. In addition to being a licensed CPA accredited in business valuation, she holds designations as a Certified Valuation Analyst (CVA) and a Certified Fraud Examiner (CFE).