How to Mitigate the Opportunity for Occupational Fraud in a Small Business

The small business owner needs to be able to accept the potential for fraud and stealing from the business by dishonest employees. Even those most trusted might be tempted if provided with the keys to the kingdom (opportunity and possessing the motivation to do so).

So what is the small business owner to do? What is the responsibility incumbent upon the businessperson, assuming, for a moment, that he or she accepts this established fact of life? The answer is simple: Do not tempt employees. There are many ways organizations inadvertently tempt otherwise trusted employees to behave dishonestly. There are some simple cost beneficial solutions. Any evaluation requires identifying where a business is potentially vulnerable and what policies and procedures can be implemented to eliminate or minimize motivation and temptation. There are also procedures to detect any adverse acts should the prevention procedures be circumvented (other than by employee collusion).

There are many prevent types of control procedures, which can be effectively implemented to mitigate the opportunity to steal from an organization. Some of these may be simplified by owner interactive involvement and insertion into the process, such as receiving unopened bank statements and any mail from taxing authorities directly, and examining the statements. Just the perception of owner involvement can be a deterrent. Also, duties and responsibilities of employees should be segregated to the extent reasonable so that no one employee has complete control over any transaction. Other owner involvement: observation and surveillance of employees, cash register procedures, managerial oversight and frequent, if not daily, reconciliations and counts of cash, review of individual customer accounts receivable balances, daily bank deposits and sales transactions. Since the ability of smaller organizations to rely on internal staff to effectively segregate incompatible functions is limited, other frequent checks and balances encompassing additional reliance on detect types of controls should be implemented. A system of reviews, approvals and authorizations of transactions should be designed to implement additional safeguards, effect accountability and reduce risks.

–Dennis Kremer, CPA/ABV/CFF/CGMA, CVA, Partner