Business Fraud Prevention
A checklist for small business owners to avoid fraud
These days, I’m lucky to have a very trustworthy and reliable team of finance people who I work with in my companies.
But twenty plus years ago, I was a relatively inexperienced business person. I didn’t know anything about accounting, and accounting seemed boring and scary compared to the fun of actually running the business.
Therefore, I did what a lot of small business owners do, which was completely abdicate looking after my money to my accountant, who happened to be someone external to the company, who worked without a lot of supervision.
I was smart enough to make sure that I was the only person who had access to my bank account and I made all the payments, which meant that I looked at what was being asked to be paid by the accountant and my staff, checked invoices, and made sure that things “smelt right” to me.
Unfortunately, the scam I got caught out by, was that my accountant had set up an account named “IRD”, that I regularly sent money to, but many years later it was discovered by chance that this was actually an account my accountant had set up, and so I he was inflating the IRD amounts that needed to be paid and skimming money off the top.
A few years later, I was caught out by another scam when I got into hospitality and was running a bar. This time the scam was that the bar staff were bringing in their own alcohol into the bar at night, and then they would sell drinks using their own alcohol and keep the cash, which meant that my stock was not down or missing, everything tallied up, but the turnover of the bar was super low compared to the actual sales.
As a result of the lessons that I was caught out by, over the years I complied my own financial fraud prevention checklist, which I will share below.
Segregate Duties: Ensure no single employee has control over all aspects of financial transactions (e.g., one person shouldn’t handle both accounts payable and receivable).
Limit Access to Bank Accounts: Restrict who has access to online banking and ensure all access is logged, Ideally the owner of the business should be the one making and overseeing payments, even if other people load them into the banking program to be made.
Dual Signatures: Require two signatures for payments above a certain threshold to prevent unauthorised disbursements.
Use 2-Factor authentication: on all financial systems such as Xero, Invoicing, Banking (largely always enforced by banks now anyway)
Reconcile Bank Statements Regularly: Have someone other than your regular bookkeeper review and reconcile bank statements quarterly.
Review Invoices: The business owner or another trusted employee should periodically review invoices for irregularities.
Use Accounting Software: Implement robust accounting software with audit trails and restricted access for sensitive functions, Xero is a good kiwi company with global reach and I use them for everything.
Conduct Audits: Perform unannounced audits to check for inconsistencies or irregularities.
Rotate Duties: Periodically rotate financial responsibilities among employees to reduce the risk of long-term fraud.
Require Vacations: Mandate that the bookkeeper takes time off, allowing another employee to review their work during their absence.
Monitor Payroll: Regularly review payroll records to ensure there are no ghost employees or unauthorised raises.
Set Spending Limits: Establish spending limits on credit cards or purchase orders to minimise unauthorised transactions.
Separate Personal and Business Expenses: Prohibit employees from using business funds for personal expenses and enforce this policy strictly.
Verify Vendor Authenticity: Regularly audit vendor lists to ensure all vendors are legitimate and not created fraudulently.
Approve New Vendors: Require management approval before adding new vendors to the system.
Monitor Cash Transactions: Reduce reliance on cash and implement strict controls for handling cash.
Perform Background Checks: Conduct thorough background checks before hiring a bookkeeper or anyone with financial responsibilities.
Train Employees: Educate employees on recognising and reporting suspicious activity, fostering a culture of accountability.
Create a Whistleblower Policy: Provide a confidential way for employees to report fraudulent activities or concerns.
Review Financial Statements: Regularly review the company’s financial statements, focusing on trends and discrepancies
Engage External Auditors: Periodically hire an independent accountant or auditor to review the company’s finances.
Excellent advice. Thanks Seeby.
Selwyn.
Very insightful and timely, thank you for sharing!