8 Easy Tips to Prevent Business Fraud

By Ben Warga

Business fraud is regularly in the news. Unfortunately, the source of the fraud is most often an employee of the company. While I believe trust in employees is an integral feature of a healthy business, I also believe that strong internal controls for fraud prevention are necessary in every firm. With that in mind, I’ve created this list of 8 simple internal controls that require little effort to implement or enforce.

1. Division of responsibilities

Division of responsibilities is one of the easiest ways to prevent fraud. If the person making deposits and recording deposits is the same individual, that person could pull a check out of the deposit and also ensure that the same check is not recorded in the books. With no record of that check, it’s as if it never existed, making it much more difficult to track.

The person processing payroll and the person recording payroll should be two different individuals. This way, one person is always checking the other’s work to keep an eye out for any funny business. I don’t process payroll to ensure that this kind of separation is maintained. Many business owners want to grow and hire their own accounting department, and implementing this practice with my clients ensures that it is a core feature of their business operations for years to come, even after I’m long out of the picture.

2. Check signing is the sole responsibility of the owner(s)

No one should be able to sign checks except for the owner(s). Once a business starts delegating check signing authority to employees, it opens itself up for fraud. You may have hired the most honest employees who would never dream of stealing, but it’s better to be safe than sorry.

3. Use cloud accounting software and check it regularly

Cloud accounting software allows you to check your accounts from anywhere with an internet connection, and to see which checks have been entered and for what purpose. You should also be checking your bank account regularly, but the accounting software will tell you how a check is actually coded (office supplies, rent, insurance, etc.) so you’ll know if there are any odd entries. For instance, why is there a $500 check for insurance in May when the policy payment is due in August?

4. Report all checks to your bookkeeper

This is especially important if you don’t have a bookkeeper in the office. You should email or call at the end of every day when you write checks to inform your bookkeeper of the check number, payee, amount, and purpose. This serves two purposes. First, it may take a few days for that check to clear the bank, and this practice keeps your books in good order and prevents you from overdrawing your checking account. Second, if a check shows up in the feed (assuming you’re using cloud accounting) that hasn’t been reported, it should immediately send up a red flag with your bookkeeper, who can then contact you to see if it was written and not reported, or if this is a fraudulent check.

5. Keep blank checks in a locked file drawer, cabinet, or safe

If someone breaks into your office, or if a client with sticky fingers wanders in, or if the cleaning crew hires someone who isn’t on the up-and-up, or even if your company hires a less than honest person, this practice prevents those individuals from having access to not only blank checks, but also your routing and account numbers.

6. Run background checks on all employees with access to checks

If you have an employee who has access to checks, it’s a good idea to pay for a background check to be safe. Most of the time, it will come up clean, but if it doesn’t, you’ll be glad you paid a little extra for that knowledge.

7. Ensure that the check register is properly maintained

The easiest way to catch fraud before it does significant damage is to keep an eye on your check register. If duplicate check numbers pop up, or if a check that hasn’t been written yet is cashed, you know you’re the victim of fraud.

8. Write supplier checks to a company, never to an individual (even if the individual is an owner)

If anyone from a supplier tells you it’s OK to write a check to them, thank them kindly, and then write a check directly to the supplier. It might be common practice for their company to accept checks that are written to individuals, but it’s not a proper business practice. The employee could either underpay their employer and leave you on the hook for the remainder, or if it’s the owner, it may be a sign that the owner is not reporting business income.

The above recommendations are just a few of the internal controls that help prevent fraud. There are other, more complicated processes that can be adopted, but these are best left to be researched and crafted by the individual business owner. If you find that your business is lacking internal controls, don’t wait to bring them into play. Starting today could save your business a significant amount of money and trouble down the road. 

Email me at ben@theincomedepartment.com to schedule a free 30 minute consultation.