Alfa One Corporation Complete Accounting Solutions: How to Protect Your Business Against Fraud
Post on 07-Apr-2017
alfa one corporation complete accounting The amount of fraud being perpetrated against businesses is getting worse, both in terms of thenumber of instances and the amount of money that is being lost, and some of that can beattributed to worsening economic times, according to research. Almost half of the companiesaround the world surveyed by PriceWaterhouseCoopers (www.pwc.com) in 2009 reported thatthey suffered one or more instance of economic crimes. The survey, which involved 3,000executives of businesses large and small in 54 countries, found that 88 percent of U.S.companies that reported some type of fraud also reported declines in financial performances. Inaddition, three-fourths of the crimes against businesses in the U.S. were carried out by insiders. For small and mid-sized businesses, the vulnerability to fraud can be compounded because of thesometimes informal nature and the fact that fewer staff members can result in less oversight --and a lack of checks and balances. 'Small businesses tend to be very informal in nature. A lot of times they're either formed withfriends or family members, and all the formalities are not in place as they would be in a largerbusiness, ' says Elena N. Lougovskaia, co-founder of Lougovskaia Boop, LLC(www.lougoboop.com), a law practice in Cleveland, Ohio, focused on business law andcommercial litigation. 'Employees wear many different hats and perhaps decision makers shouldbe separated from people who sign the checks or one person should be responsible for signingcheck and a separate person should be responsible for accounting, processing invoices, andpurchasing.' The following pages will cover the types of fraud against business, how to detect fraud in yourbusiness, and how to set up policies and procedures to prevent your business becoming a victimof fraud. How to Protect Your Business against Fraud: Types of Fraud against Business The media is filled with stories of consumer victims of fraud. But the reality is that businesses,especially smaller enterprises, are more often the victims of fraud than consumers. The types offraud can vary wildly, from accounting scams carried out by employees to fraudulent returns fromcustomers to data theft by outsiders. Businesses have less protection than the consumer and, insome cases, can be held responsible in a business fraud scheme, owing liability to banks,shareholders, insurers, credit card processors and other entities. New laws also hold businessesaccountable for liability in the event of some types of fraud perpetrated by third parties, such asdata breaches. Sources of Business Fraud In order to understand the types of fraud that your business may be vulnerable to, you must firstunderstand the different sources of these crimes. Most professionals agree that the top sources ofbusiness fraud, ranked in the order of frequency and cost, are as follows: Employees and Officers In previous surveys, PriceWaterhouseCoopers had found that the sources of crimes againstbusiness were evenly split between insiders and outsiders. But in the 2009 survey, the numberstipped in favor of insiders carrying out the majority of crimes -- in 76 percent of the cases in theU.S., according to the survey. The increased financial pressures in many companies have alsoprompted a rise in the amount of fraud committed by middle managers, which now accounts for42 percent of internal frauds globally from 26 percent in 2007, the survey found. Meanwhile, theAssociation of Certified Fraud Examiners (ACFE) (www.acfe.com) estimates that businessorganizations lose 5 percent of annual revenue to fraud by employees and officers. 'Managers and small business owners have a tendency to trust their employees to a higherdegree and, because they are doing more, they may not be as detail oriented as they should be,'says Allan Bachman, education manager for the ACFE. 'That level of trust is often betrayed.Sometimes employees start taking advantage of the fact that the boss isn't looking and thinks I'mdoing a great job.' The most common types of insider frauds include theft of assets and accounting frauds, but thistype of crime can also include other categories, such as fraudulent worker's compensation claims.'If you're in a no-fault worker's compensation state, as long as they're injured within the scope ofemployment, they can receive compensation for their injuries,' Lougovskaia says. 'That's an areawhere employees could be taking advantage.' Employees, managers, and directors have the inside track and understand how a business works.That's why they are able to perpetrate so many different types of schemes -- and how they canoften go undetected. Bachman says that the biggest source of insider fraud against businessesinvolves purchasing and procurement of goods and supplies. Insiders may be buying more goodsthan a business needs and lining their own pockets or paying invoices to an external third partyfor fraudulent orders. Other common schemes, says Bachman, include creating fictitious vendorsor no-show employees -- who get paid for doing nothing. Accounts payable is another area whereinsiders may be skimming money by taking cash payments and failing to report them or replacingtoday's payments with cash paid at later dates. Customers Customers can also be notorious for trying to perpetrate fraud against businesses. Whetherwriting bad checks, using stolen credit cards, returning items not purchased from a business, orfiling fraudulent injury and liability claims, there are a whole host of schemes that customers canperpetrate that will cost your business money. 'This is a very litigious society, so if you own a store or surface where customers walk or you havea parking lot, you are susceptible to people claiming they fell and injured themselves,'Lougovskaia says. 'If you don't have any surveillance and safety procedures in place, you aresusceptible to frivolous liability complaints.' False return schemes are another type of fraud that tends to impact retailers. People sometimesbring back merchandise from one store to another or they bring back merchandise that has beenused. 'I've seen frauds where someone walks into a store and bought three pieces ofmerchandise, went out to their car and put the merchandise away, and came back into the storeand picked the same stuff up and put it in a bag and walked out with it,' Bachman says. Contractors Businesses are often the target of unscrupulous contractors' overcharging, over billing, kickbacks, failing to perform contracted work or service, and other actions. Some vendors you hire may try to scam you by billing for work they never complete. 'I can comeinto your company to provide carpet cleaning and you give me the alarm code and I come in oncea month instead of once a week but bill for providing the service once a week,' Bachman says. 'Ofyou can short out services or goods because no one is paying attention. You order 50 chairs and Isend 45. There are a lot of different ways of doing this.' Third-Party Attacks A growing number of types of fraud are being perpetrated by electronic means. Hacking,slamming (changing your telephone service without your knowledge), phishing (acquiring usernames, passwords, credit card information), identity theft and other forms of business fraud aresome of the most difficult to control. More businesses are being held accountable for databreaches perpetrated by third parties, as 45 states, the District of Columbia, and some U.S.territories now have laws on the books requiring companies to notify potential victims if theirpersonal information has been stolen or otherwise compromised. How to Protect Your Business against Fraud: How to Detect Fraud Given that fraud against your business can impact the bottom line, it's important to set upprocedures to verify adherence to anti-fraud policies and to detect and deter possible businessfraud. Lougovskaia says business executives should commit to talking control by developing anenterprise-wide, anti-fraud policy that: -Verifies that anti-fraud work practices are followed and detects fraudulent activity. -Develops written procedures that dictate work processes in critical areas. -Institutes checks and balances and divides key responsibilities. Below are several ways to deter and detect fraud in your business: Employee Tips and Reporting An often overlooked, but excellent way to prevent fraud is to develop an anonymous way foremployees to report suspected fraud and work practices that lead to fraud. Businesses thatinstitute anonymous employee reporting detect fraud earlier and significantly limit financial losses.'You could have an anonymous tip box,' Lougovskaia suggests. If you do opt for a tip box, youshould take steps to ensure that the process isn't abused to settle personal grudges. One waywould be to appoint one individual to investigate all claims and ensure that anonymity isprotected. Internal Audits and Surprise Audits Work processes, inventories, and accounting should be subject to regularly scheduled andannounced internal audits. In addition, unscheduled -- or surprise -- internal audits also should beconducted. Work processes, inventories, and accounting can be altered in advance of regularaudits, but knowing a surprise audit may occur removes temptation and increases the chance forfraud detection. External Audits At a regular interval, external auditors should be employed to review company accounts,contracts, inventory and work processes, Lougovskaia says. Depending on the size of yourbusiness and whether it is a publicly-held enterprise, this may be required by law. Thus, it makessense to set up external audits early in the history of your business so compliance with applicablelaws and regulations can be achieved as your business grows. How to Protect Your Business against Fraud: How to Deter Fraud There are ways to deter fraud. One of the most important steps a business can take is to create asystem of awareness at the top level of management. 'Never think that it can't happen here,'Bachman says. 'Create a level of awareness throughout the organization that we're watching forit. Make it clear in terms of deterrents that, if we catch it, we're going to prosecute, both criminallyand civilly.' Civil action may be needed because people who have profited from ill-gotten gainsmay not have the cash on hand to return - they may have bought items, such as fancy cars orjewelry. Written procedures are necessary to develop internal consistency and to insure adherence toanti-fraud work practices and policies. At a minimum, the business should take the followingsteps: -Hiring practices and background checks. Background checks should be a precondition toemployment. The business should secure written permission to conduct such investigations,which should include criminal background investigation, verification of education, right to work,licensure and past employment, Lougovskaia says. A credit check should be performed onemployees who will handle cash or inventory. -Cash and receivables and accounting. A written cash and receivables handling policy shouldaccomplish two goals. It should train employees to spot bad checks, counterfeit currency, andstolen credit cards and insure proper accounting. 'The policy should address possible disciplinefor cash shortages and failure to strictly follow handling guidelines,' Lougovskaia says. The policyshould address the use of customer-provided information and the handling of vital customer data. -Inventory handling and tracking. A written inventory policy covers sales stock and companyequipment. Pilferage is often an 'entry level' criminal enterprise. Contractors and employeesengaged in this activity often perceive a weakness in inventory controls as an indication that fraudwill not be detected. 'What happens to those items from the time they get off the truck to the timethey hit the store shelves?' Lougovskaia says. Put those procedures in writing and give them toemployees. -Contract and invoice reviews and procurement. Regular reviews of accounts payableinvoices, purchase orders, and payments can eliminate various types of fraud. It is important forsmall businesses to be able to verify that contractors have performed the work that they bill for --before paying the invoice from that contractor. 'You need to outline billing practices with yourcontractors and require them to itemize billing, including the names of employees involved andlisting a quarter hour itemization for each task,' Lougovskaia says. 'You need to provide betteroversight and you need to have it in writing.' -Critical data and corporate information. These days, every business that keeps sensitive data-- whether about customers or employees or the company -- need to have written data handlingpolicies. These policies should spell out who has access to vital information, passwords, accountnumbers, databases, etc. Document retention policies should include scheduled, mandatoryshredding of certain documents containing employee information or corporate data. Useconfidentiality agreements and non-compete agreements for key employees. -Customer returns. Customer returns can be a significant source of fraud. Since most stateconsumer laws require a posted customer return policy, it makes sense to develop a writtenreturn policy that will eliminate fraud risk, Lougovskaia says. Elements of your policy might includethat you require returns to take place where the item was purchased, require a receipt, and do notissue cash refunds for credit card or check purchases. -Visitor/customer injuries. There are ways of deterring fraudulent customer claims of accidentsor incidents involving your business property. Retail establishments should consider installingvideo surveillance systems and having a handheld video camera ready in the event a customerfalls on the premises to protect your business. If your business is not a retail establishment, youmight consider requiring visitors to sign in and wear clearly identifiable badges. Tracking customerclaims of injury via incident reports, and training employees to create reports immediately, cutsdown on fraudulent injury claims. -Internet, e-mail, laptops, cell phones, and storage devices. Clearly defined policies need toestablish that Internet access and e-mail remain the property of the business for businesspurposes. Eliminate all employee access to non-work e-mail and Internet sites, Lougovskaia says.Written guidelines addressing the use of business laptops, cell phones, and storage devices willreduce the possibility of critical corporate and customer data being lost or stolen. How to Protect Your Business against Fraud: Creating Checks and Balances Internal controls are one of the great fraud deterrents. Internal controls involve the processes bywhich a business operates and goals are achieved. In accounting, it refers to the reliability offinancial reporting and compliance with laws and regulations. Setting up good controls isimportant for a business to detect and deter fraud. 'A lot of organizations have an internal audit department, but small organizations can't alwaysafford that luxury,' Bachman says. 'But they do have accountants and other people in charge ofkeeping track of accounts.' However, small businesses may have some weaknesses in terms ofcontrols, such as putting the same employee in charge of making deposits and reconciling bankstatements. Allowing one employee/department to perform multiple critical functions isinconsistent with preventing fraud. By dividing the responsibility of certain functions, a system ofchecks and balances is created and this creates an environment where fraud is less likely tooccur. Lougovskaia says businesses should consider the following examples to establish betterchecks and balances: -Separate the person/department writing the checks from the person/department that reconcilesthe bank statement. -Do not let the person initiating a purchase order approve the payment regardless of positionwithin the company. -Separate the functions of creating databases, maintaining databases and using the data. Forexample, the person responsible for generating payroll checks should not be entering employeedata. -Require separate confirmation and storage of inventory records away from the location of theinventory and rotate responsibility for taking inventory. -Assign administrative access to the business data, web site, intranets, and email accounts todifferent individuals. Implementing a fraud prevention plan requires commitment and also requires the business toprovide the right tools and support to its employees. Businesses are better off if they build indeterrents, establish good controls, and provide oversight. It's also important to encourageemployees to have a conscientious attitude, says Bachman, such as: 'Our business' survivaldepends on employees being honest.' 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