The trusted employee can be both the backbone and the nemesis of small business. Sometimes an employee can run the business so well that the owner/manager may realize too late that the company's assets were entrusted to a dishonest individual.

Typically, employee fraud involves misappropriation of funds, dishonest expense accounts, cheque forgery, manipulation of cheques, purchases for personal use and kickbacks.

Small businesses are particularly vulnerable as they often do not have sufficient staff to properly segregate responsibilities and functions.

The owner/manager may never be able to eliminate all losses. However, safeguards can be put in place to limit potential losses.

The Mail

If possible, open and review all mail. This simple procedure gives the owner/manager the opportunity to review customer correspondence, accounts receivable, returned mail, complaints and bills due. When the mail brings news of problems, at least they can be dealt with in the early stages.

The Bank

Review all banking transactions. False authorizations and payments to fictitious suppliers can be prevented if the owner/manager regularly reviews all of the company's banking transactions. This includes the monthly bank statement, cancelled and void cheques, debits and deposits as well as comparing these transactions with the company's cheque and deposit book records. The owner/manager should also watch for unusual things such as cheques that are non-sequential, modified, voided (particularly if they total or are the same amounts as other cheques issued), double endorsements and names similar to regular suppliers or employees. Unusual deposits could indicate an attempt to reinstate missing funds. Also check the receipt of funds from unusual sources such as sale of capital assets or bad debt settlements.

Payroll

Review each payroll run to ensure that cheques are payable to actual employees, payments are for the recorded time at the agreed rate and source deductions are remitted appropriately and regularly.

Signing Authority

Limit signing authority. If it is necessary to delegate purchasing, the signing of cheques, authorizing credit or selecting suppliers, minimize the risk of embezzlement by assigning limits to an individual's signing authority. For example, the owner/manager could allow single signing authority on disbursements up to and including $500 and require two signatures for anything above this amount.

Alternatively a separate bank account can be used for specific disbursements, thereby limiting the risk of loss to the amount transferred from the main operating account.

Computer Security

Computer security is essential. Many systems provide for controlled access by password into various accounting and inventory functions. Segregating duties so that the accounts payable clerk cannot access the general ledger and the payroll clerk cannot access employee information will curtail manipulation of payments and rates.

References

Before hiring, check references. This is particularly important for situations in which a great deal of trust is placed on one individual. If necessary, use the services of a private security firm.

Vacations

Be wary of an employee who never takes holidays. The motive for staying around may be the need to ensure embezzlement is not uncovered.

Ethics and Conduct

Regardless of size, all companies should have a written ethics and code of conduct policy which details the company's expectations of employees and the way in which the company's affairs are to be conducted.

Beyond the company's written policy, the most important factor in preventing employee fraudulent activity is the integrity of its management team. Fraud is consistently found to be more prevalent in companies in which management sanctions fraud and illegal acts against suppliers and customers.

Limit Your Vulnerability

To limit your company's vulnerability to employee fraud, clearly define employees' responsibilities and establish appropriate checks on the tasks performed.

Logan Katz LLP Accountants can assist you in reviewing the company's procedures and systems and establishing cost effective internal controls for all areas of risk. Please do not hesitate to contact us for additional information.

The above provides general information only. It should not be regarded or relied upon as accounting or taxation advice or opinions. Logan Katz LLP Chartered Accountants would be pleased to provide more information or specific advice on matters of interest to you.

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