Press Room

Five steps to prevent fraud in your business

Money Management

Monthly financial advice
from the MACPA

For release: October 2007

Every year, businesses all over the country lose billions of dollars to employee fraud. And while the big companies make the headlines, small- and medium-sized businesses are equally – and sometimes more – at risk, primarily due to a lack of awareness or a false sense of security.

According to the Maryland Association of CPAs, the fraud prevention tips below offer smart small business owners steps to protect their business’ financial assets as well as their reputation.

1. Screen applicants thoroughly before hiring them

Hiring the right employees is the best way to stop fraud before it happens. CPAs say that it’s a good idea to perform background checks on potential employees. You’ll want to screen the applicant’s criminal history, civil history, and drivers’ license violations, and verify his/her education, past employment and references.

Since employees experiencing financial difficulties may be more prone to committing fraud, think about requesting a credit check as well. Before performing background and credit checks, be sure you understand and comply with any legal requirements for obtaining the applicant’s consent.

2. Implement internal controls to reduce fraud risk

Many small businesses depend on one person to process payments and invoices, make bank deposits, handle petty cash, and reconcile bank statements. This is asking for trouble. Your business should implement a system that spreads and, if possible, rotates the financial duties of the business among two or more employees.

Store bank checks in a secure location and carefully review your bank statement each month, taking special care to look for checks made out to cash, employees or suppliers you don’t know. It’s a good idea to have your bank mail your company’s statements to your home address, so you’re sure you receive them before anyone else.

Insist that all employees, especially those with financial responsibilities, take a mandatory vacation of at least one week of consecutive days. Fraudulent employees will often resist taking a vacation out of fear that whoever does the job in their absence will uncover the fraudulent activities.

3. Be a role model and lead by example

An effective way to prevent fraud in your business is to create a positive work culture. It is important that the business owner and senior management serve as role models of honesty and integrity. If the individuals at the top take a careless approach toward company policies and procedures, they are inviting their employees to do the same – or worse.

Set clear standards from the beginning by implementing a company-wide written code of conduct, and make it clear to employees that the company has a zero tolerance policy for employee theft. To maintain credibility, be sure to conduct a prompt and thorough investigation of every incident.

4. Implement an anonymous theft reporting system

Every company should establish a system that makes it easy for employees, vendors and customers to anonymously report suspected fraud activities. Be sure employees understand what constitutes fraud and that all reports are treated confidentially and without reprisal.

5. Work with a CPA

Consider hiring a CPA to conduct both regularly scheduled and surprise audits. Audits can serve as a deterrent because when employees are aware that there will be checks of their areas, they are more likely to stay honest. A CPA can also help you set up and maintain effective internal financial controls.

Only CPAs are equipped to address your full range of financial needs with integrity and insight. In Maryland, CPAs must pass a rigorous two-day examination, adhere to strict ethical and professional standards, and, beyond college, complete 80 hours of continuing education every two years to be certified by the state — accountants do not.

Your doctor is certified; your lawyer is certified. Make sure your accountant is a certified public accountant.

For CPA referrals in your area, contact the MACPA at (410) 296-6250 or click here.

The Maryland Association of Certified Public Accountants (MACPA) is a statewide professional association that provides leadership, information and services for its nearly 10,000 CPA members, who are employed in private practice, industry, government and education. CPAs are business and financial professionals who have passed a rigorous two-day examination in order to be licensed by the state. CPAs are committed to protecting the public interest, and must adhere to stringent ethical and professional standards and continuing professional education requirements.