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LGI CFO Outlines Five Ways to Minimize Fraud in your Business
Outsourced CFO Company helps small businesses, nonprofits with financial management
Small businesses with fewer than 100 employees are the most frequent fraud victims, with the median loss exceeding $150,000, according to the Association of Certified Fraud Examiners.
No matter the size of your organization, that’s significant money.
One thing I’ve learned from my career heading an outsourced CFO firm is this: it’s nearly impossible to predict which employees may attempt to steal from your business.
After 25 years of helping small businesses and nonprofits manage their finances, I’ve found it’s easier to minimize opportunities for fraud than to predict or prevent it.
Some examples of fraud include credit cards being used for personal purchases; changing payees on checks; stealing cash from a cashbox; paying fictional vendors; and inflating payroll or expense accounts.
Business owners and nonprofit directors should randomly check financial reports and information. Data should be backed up daily so fraud can be proven later if needed.
And while these may seem like commonsense controls, during the daily routine of doing business with people you know and trust, sometimes CEOsand managers may not be as diligent as they should be.
Here’s a list of five ways to prevent fraud in your business:
Beef up internal controls– Segregate duties between employees who maintain records and those with custody of assets. Review payroll before it’s processed, especially for the payroll clerk. Knowing that an independent party will review the financial statements periodically helps prevent fraud.
Also, set up safeguards for assets such as cash, receivables, inventory and fixed assets. Internal controls are important for accountability and accurate financial statements as well as preventing and detecting fraud.
Incorporate "detective controls" –These are mostly conducted to detect fraud rather than prevent it. An independent person should review the bank reconciliation and test some checks to see who they are made out to– especially if a signature stamp is used. The use of signature stamps should be carefully controlled.
Credit card fraud in businesses is relatively common. Credit card statement reconciliations should be reviewed and all receipts accounted for, especially for gas cards.
Controls are better when employees use their own credit cards and submit receipts for reimbursement.
Compare and contrast expenses-- Each month’s operating results should be compared to the same month in previous years and to budget, with an explanation of significant variances provided by your financial team.
Insure your business against fraud-- Employee dishonesty insurance coverage is inexpensive. Often, maximum coverage is $500,000. I recently received a quote to increase coverage for a company doing $30 million yearly in sales from $100,000 to $500,000 for only $660 per year.
Reinforce a positive corporate culture-- Upper management sets the tone in any organization for behavior that is allowed or disallowed as it pertains to all matters of business, including company finances. An ethics policy is important for every organization.
Having proper internal controls against fraud can save your business or nonprofit not only a lot of money, but the time and distress to untangle the fraud and replace the perpetrating employee.
Steve Lumley is founder and CEO of LGI CFO of downtown Cincinnati, which celebrates its 25th year in business this year.The outsourced CFO services company serves privately-held small businesses and nonprofits throughout greater Cincinnati, Dayton and northern Kentucky. For information, go to www.lgicfo.com, or contact Lumley at email@example.com or (513) 241-6700.