The Biz of Pacelinebiz

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Playing with fire

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Today it’s time to talk about a dangerous combination.  This recipe can destroy vast amounts of wealth without notice.  Usually it happens right under your nose.  This is a recipe to avoid at all costs.  It has 2 main ingredients – motive and opportunity.  What does this simple mixture make?  Fraud.

Yes, today let’s talk briefly about fraud.  This can be stopped by eliminating one of the two ingredients.  Motive is always going to be there and you can’t control that.  Opportunity is under your control.  Even if you are a small company without the ability to have an internal audit department you can thwart fraud.  I will list a few things that a business owner can do to stop fraud before it starts.

 Elimination of opportunity.  This is really a simple concept.  Would you keep all of your cash in a glass jar in an unlocked office on a desk in plain view near a secluded exit?  Of course not, but there are things that  firms do that allow similar opportunities.  Below is a list of things to do to strengthen internal controls.

1)      Have cash accounts reconciled by a person who does not handle cash and review the reconciliation yourself if possible.  Do not allow the entire process to be done by one person.  Have someone open the mail and list all cash/checks received and prepare the bank deposit.   After the cash has been “inventoried” independently, you now have accountability.

2)      Have the person in charge of cash take regular vacations.  While on vacation you have the ability to “poke around” and a person who is dishonest would be unwilling to take vacation.  If that person in your company resists taking vacations that could be a warning sign.   Usually a person committing fraud is described as a perfect employee, never taking vacations and working late until everyone leaves.  (It takes a lot of work to cover your tracks)

3)      Review all checks that are being written.   Better yet, personally sign them if at all possible and ask questions about anything irregular.  Ask questions – even when you know things are ok.  Make the person who generates the checks feel as they are under scrutiny.  You do not want to be writing checks to an accomplice such as XYZ Company, (the cousin, brother in law etc of your employee).   Watch for bogus vendors.

4)      Review all payroll tax deposits made and get confirmation they are made.  Again, the best solution is to make the deposits yourself.  Stealing payroll tax deposits is a common fraud tactic because the notices from the taxing authorities are slow in coming and arrive by mail allowing for a long lead time.   This is another reason why you should have the most trusted person you know or yourself open the mail.  That way, no surprises arrive months after your employee is long gone with stolen funds.

5)      My final bit of advice is this.  Don’t abdicate the responsibility for internal controls to anyone else.  Be involved in your business and keep your schedule from becoming routine.  Have people think you can show up at any time.  You can use this for your advantage in another way.  You can “catch” your employees doing something right.  Reward that when you see it.

 Have a great week and by the way, did you take that vacation yet?

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Written by pacelinebiz

August 16, 2010 at 10:00 pm

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