Your employees may not be as honest and reliable as you think. Michael Ueltzen, CPA and chairman of the American Institute of Certified Public Accountants (www.AICPA.org) Business Valuation and Forensic Litigation Membership Section says accountants recommend taking these steps to prevent fraud:
Step 1: Set clear standards. An employee manual can establish the principles and values to guide your organization.
When hiring new employees, check references and perform background checks that include employment, credit, licensing, and criminal history.
Step 2: Check employee references. When hiring new employees, check references and perform background checks that include employment, credit, licensing, and criminal history.
Step 3: Safeguard your organization. Secure organizations, for example, closely guard and monitor their checks. Using prenumbered checks enables you to audit for missing checks. Also, checks clearing out of sequence can be spotted more easily. Other precautions include having a "voided check" procedure and never signing blank checks.
Step 4: Safeguard payroll. Small business owners and managers should take the extra time to review every payroll check personally. "Although time consuming, this procedure provides a monitor to ensure employees are being paid appropriately," says Ueltzen.
Step 5: Control who reviews sensitive documents. Small business owners should control who first receives the bank statements and other sensitive documents. Small business owners should have a separate post office box for the purpose of receiving bank statements, customer receipts, or any other sensitive documents.
Step 6: Consider independent review. All account reconciliations and general ledger balances should have an independent review by a person removed from the day-to-day transactions. "People outside the direct bookkeeping function within your organization should be familiar with your company's bookkeeping and record system," says Ueltzen. "This permits spot checks and reviews, providing a deterrent for fraudulent activities."
Step 7: Consider hiring a CPA. If a business owner is not in a position to provide this level of review, make sure your client knows that CPAs can be hired to take on some of the independent review function, or provide all of the required bookkeeping services.
Step 8: Consider annual audits. Although not required, Ueltzen says, "an audit is a good idea. It will not discover all fraud within an organization, but it will give your client an opportunity for someone removed from the daily operations to take a 'bird's eye view' of the business."