Small Business – Where Fraud Can And Does Occur While the headlines have been filled with news of financial scandals at large corporations like Enron, Adelphia, WorldCom and Tyco, small business owners across the country are now becoming aware that fraud also can occur in their business. Recent events have served as a wake-up call as companies see what’s been going on in the marketplace and realize that without some kind of controls, it could happen to them. Most small businesses, however, particularly in today’s economy, have to be educated before they are willing to spend the resources necessary to implement effective fraud prevention controls. Small businesses also may tend to wait due to the so-called “expectation gap” and their misunderstanding that any services a CPA firm provides, even preparing tax returns, automatically looks for fraud. Most smaller businesses have common areas where there is much room for improvement in fraud prevention. Smaller companies, for example, often do not have enough personnel for sufficient segregation of duties - a leading cause of fraud. When the person who signs the checks is the same one responsible for approving purchase orders and adding new personnel to the payroll system, the opportunity for abuse is readily apparent. A simple solution: Owners should at least spot check the sign- offs and let their accounting departments know they have done so. Additionally, Owners can have monthly bank statements and cancelled checks mailed directly to them for a quick, cursory review. Often, a few minutes well spent by the Owner are enough to instill a control mindset throughout the organization. Owners who are too busy should consider having their outside CPA firm go on-site and periodically make these reviews. Several other practical control procedures for small businesses include: All cash receipts should be deposited intact on a daily basis. The timing of the owner-manager’s daily activities should not be totally predictable by employees. The owner-manager should utilize various analytical review procedures and key indicators (e.g., inventory turnover and current ratio) in performing financial statement review. The accounting system should utilize serially numbered documents and the documents should be accounted for through the use of the journals and registers. Also serving as a catalyst to the implementation of fraud controls is an increasing awareness on the part of advisors and directors of their own liability. Board members are accepting substantial fiduciary responsibility, providing a considerable incentive to make certain proper fraud prevention controls are in place. The importance of implementing a company-wide written Code of Conduct that is clearly and concisely communicated to all personnel also can not be over-emphasized. Creating a leadership style and culture in which fraud is deemed unacceptable combined with proper controls is the most effective way to prevent fraud. If you would like more information on fraud prevention and deterrence or would like assistance in helping to implement antifraud measures, creating a Code of Conduct, developing a company culture that has zero tolerance for fraud and designing internal control systems that reduce the risk of fraud, please contact Mark Prusinski, our audit and assurance services partner.