Recommendations To Mitigate Fraud In A Smb

It is pretty common knowledge that SMBs are the victims of workplace fraud 9 times more frequently that larger businesses. The main reason is that there is no separation of duties because the lone accountant/bookkeeper handles all accounting transactions. Often the only control in place is that the business owner signs all outgoing checks. Clearly this is inadequate.

I recently completed a thorough review of the financial accounting operations for a client. What follows is the detailed recommendations I presented. These recommendations can easliy be implemented anywhere. The accounting system in use is QuickBooks.

The main elements of Internal Accounting Controls are:

1. Competent and trustworthy personnel with clearly defined lines of authority and responsibility.
2. Adequate separation of duties. In a small/midsized businesses this is exceedingly difficult, if not impossible, to achieve. This makes it critically important to set and communicate the “tone from the top” and implement a system of controls which allow proper oversight into the financial aspects of the business.
3. Proper procedures for the authorization of transactions. Again, this is difficult to implement in a small/midsized business. Two things that are in place which mitigate this risk are you sign all checks and customers never pay in cash. Additionally you should review the reconciliation of checking and credit card statements each month.
4. Adequate records and documents. You should require:
   a- A bill for every vendor payment
   b- A receipt for every credit card transaction
   c- A signed expense report for Reimbursements, with receipts
   d- An approval for any Invoice amount changes
5. Proper physical control over both assets and records. The main assets to protect are the company physical documents and computer records. You should have adequate fire protection and regular backup of your computerized records. These backups should reside offsite in a secure location.
6. Proper procedures for adequate recordkeeping. This is an area which needs improvement. You might consider hiring a temporary “Professional Organizer” to organize the paper documents. I can refer a couple who would do a good job.
7. A resource to provide independent verifications. That could be a B2B CFO or another trusted professional resource with the appropriate skills.

In practice I recommend we implement these elements of accounting controls in the following manner:

• Set up a unique QB user account for ALL users and start using that immediately for entering accounting transactions.
• Change the QB admin account password. Do not tell the password to any staff. Do not use the admin account for entering accounting transactions.
• Set closing dates. When reviewing the past months reports close the date 2 months prior. For example, when reviewing May set the closing date to 3/31/2010.
• Review the previous weeks’ activities by looking at the memorized “Weekly” reports with your bookkeeper:
  • Bill Credits for all Vendors – ask why we received this credit
  • Checks & Bill Payments – so you know what cash left the business last week
  • Credit Memos for All Customers – ask why these were issued
  • Deposit Detail – so you know what cash came into the business last week
  • Missing Checks from Last Week – numerical sequence is a great control. Ask why checks are missing.
  • Refunds for All Customers – ask why these were issued
• Review the previous months’ activities by looking at the memorized “Monthly” reports with your bookkeeper:
  • Profit & Loss Last 5 Months – look at the trends in Income and major expense areas. Investigate unusual trends.
  • Balance Sheet Last 5 Months – look at the balance trends in Bank accounts (including Undeposited funds), A/R, A/P. Credit Cards, and current liabilities. Investigate unusual trends.
  • A/P Aging Summary – discuss those over 60 days.
  • A/R Aging Summary – discuss those over 60 days
  • Audit Trail Invoice Modifications – review for amount changes and ask why
  • Expenses not assigned to Jobs – job profitability is a critical success factor so you want to make sure all job related costs are properly assigned.
  • Uncleared Bank Transactions – you should not see transactions past the last reconciliations. If you do ask why.
  • Voided/Deleted Transactions Detail – you should know why transactions are being voided.
  • Journal Entries – I’m always curious why journal entries are used rather than normal QB transactions.

Finally, a monthly review of your financial statements by your B2B CFO is recommended.

To learn more about mitigating the risk of workplace fraud in an SMB contact Rick Daigle, rdaigle@b2bcfo.com, or 404-787-5835