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December 2011
By Jeff Carlini

     “I’ve got the best employees. They are a loyal, dedicated and trustworthy group. They would never do anything detrimental to hurt this company. The frauds that I’ve read and heard about in other companies would never happen here.” Does this sound familiar? Chances are most business owners feel this way. But is it a false sense of security?

     Can you imagine how devastating it would be to you and your business if you lost $230,000 to a fraud? According to the 2010 fraud survey conducted by the Association of Certified Fraud Examiners (ACFE), this is the median loss to private businesses per fraud scheme.

     And if that aspect doesn’t raise your eyebrows, consider that the most costly schemes are usually perpetrated by longtime, trusted employees in the accounting department who have access to the company’s money and accounting records—the very employees you have placed a great deal of trust in. Many frauds can go on for years prior to detection.

     Fraud is defined as wrongful or criminal deception intended to result in financial or personal gain. To commit a fraud, an employee must have opportunity, rationalization and motivation. Many times employees will rationalize fraud with an attitude that the company “owes” them. Many employees committing fraud believe that they are just borrowing the money and will pay it back. Fraud indicators or red flags to look for in your employees are a change in lifestyle, financial difficulties, and control issues such as refusing to share job duties or take vacation.

     As a business owner, you should be concerned about a number of different fraud schemes. The one that usually gets the most publicity is one where an employee has embezzled cash by forging checks. However, fraud can take many forms, such as: stealing customer payments and falsifying customer receivable records, creating false vendor invoices payable to the fraudster, writing unauthorized checks for personal expenses, inflating expense reports, or paying “ghost” employees (someone who is not a current employee) and then taking the check.

     So what can you do as a business owner? Although no amount of controls or oversight can completely eliminate the risk of fraud on your business, there are steps you can take to increase controls and reduce fraud risk. By implementing these measures, you will be able to lower the opportunity for fraud.


• Install a tip/fraud hotline. The one number source for finding fraud, tip hotlines are generally run by independent third parties who specialize in this area. They are easy to implement and relatively inexpensive.


• Have intimate knowledge of the day-to-day operations of the business, including having a physical presence. An absentee owner gives employees more opportunities to commit fraud.


• Be careful not to co-mingle business and personal expenses. Employees watch how you handle company money and may use this to justify their own actions.


• Review monthly financial statements on a timely and consistent basis; look for unusual trends.


• Review all supporting documentation for invoices and expense reports before signing checks. Know your vendors and the frequency of payments to them.


• Use online bank access to view activity in bank accounts or get bank statements sent directly to you and review cancelled checks or images to detect checks written without your knowledge or if payees were changed after management signature.


• Separate incompatible duties. Have one employee receive customer payments, but others make bank deposits and reconcile the bank statements, eliminating the opportunity to misappropriate cash and then conceal it.


• Review payroll reports paying special attention to new employees, terminated employees and pay rate changes. Hand deliver payroll checks periodically by surprise to prevent a payroll manager from writing a check to a “ghost employee” and then intercepting it for personal deposit.


• Prepare a zero-based budget every year. A fraudster who is stealing over time will “build-in” the theft into the budget.


• Learn how to run key accounting reports from your accounting system. A fraudster may create false reports to give to management to hide the fraud.


• Safeguard inventory and company equipment. Perform unannounced, surprise physical counts of both inventory and equipment to validate that assets are where they should be.


• Discuss your current control systems with your CPA. Consider having your accountant perform a set of agreed-upon procedures to test specific controls to test if they are working properly.


• Monitor use of company credit cards closely. Adopt a policy for no personal expenses on company credit cards.


• Make sure your business has adequate employee theft coverage which is relatively inexpensive; many businesses either do not have this coverage or don’t know how much coverage they have or need.


• Contact your CPA or CFE perform a risk assessment and develop a plan to help protect your business from fraud.


     In most cases, your company is the largest investment that you have. In these economic times it is more important than ever to keep a close eye on that investment.


     Content contributed by Jeff Carlini, CPA, CFE, audit manager with Potter & Company, P.A., a locally based certified public accounting firm offering core services of audit, business consulting, tax, and financial analysis. For more information, contact him at 704-926-3300 or visit

Jeff Carlini, CPA, CFE, audit manager with Potter & Company
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