According to recent national news reports, the average
American currently carries about nine credit cards with a total balance
approaching $10,000.
Consider this scenario. Unbeknownst to you, a bookkeeper you
hired seven years ago has fallen behind on her credit card payments. She
likes to visit casinos and is now spending more and more of her free time
gambling. Her debt is building and she increasingly sees gambling as a way
out of her financial situation. Following another run of “bad luck” this
month, her monthly expenses far exceed her ability to make the payments.
So she turns to you—just not directly. Since she handles
your payroll, she devises a scheme using fictitious part-time and temporary
employees. She “pays” them an amount lower than the magic number you’ve
selected to require two signatures, then cashes the checks or deposits them
into a bank account. When she starts to defraud you, she fully intends to
pay the money back. But, with her debt spiraling out of control, the amount
stolen continues to increase.
The Association of Certified Fraud Examiners (ACFE) has
developed a fraud triangle—the
three essential elements common in fraud schemes. They are opportunity, financial pressure,
and
rationalization. All
three are clearly present in the case above.
What is the difference between fraud and embezzlement? Fraud is defined as the use of deception for
unlawful gain or unjust advantage. Embezzlement is the act of an employee or
agent stealing or using the employer’s money or other property for his/her
own purposes.
Fraud experts say that small businesses are the most
vulnerable to internal theft from employees. The typical scheme occurs at
companies with fewer than 100 employees. According to an ACFE study of 1,134
fraud cases from 2004–2006, the average amount stolen is $159,000, but the
median loss for small businesses is actually higher at $190,000. This crime,
when spread over a number of years, can force a small company into
bankruptcy.
Some additional fraud facts from the ACFE study:
Men commit
three-fourths of fraud cases nationally and the typical perpetrator is a
college-educated white male.
Average
fraud scheme lasts 18 months before it is detected.
Most fraud
is detected as a result of complaints from other employees, not through
audits.
Most
common fraud cases in small businesses involves employees writing fraudulent
checks, skimming revenues, and processing fraudulent invoices.
Ten Fraud Prevention Strategies
1. Separate your accounting functions. Assign deposit and account
reconciliation functions to different people.
2. Require two signatures on checks over a
predetermined amount - say, $500.
3. Never sign a blank check.
4. Consolidate your bank accounts so that your
bookkeeping accurately reflects your company’s true financial
position.
5. Eliminate petty cash.
6. Implement a purchase order system.
7. Review expenses and supporting vouchers carefully.
8. Have an outside auditor review your books annually.
9. Do background checks and speak to references before
you hire prospective employees.
10. Prosecute suspected embezzlers and employees who commit fraud.
Establishing and enforcing sound business accounting
practices can be your best defense against employee fraud and embezzlement.
By taking the opportunity out of the fraud triangle, you can prevent this
growing crime from striking your business.
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