MARKET SCAMS

[thepennyking]

Occupational fraud costly



Small businesses easy targets
By Nell Luter Floyd
[e-mail]

WorldCom, Enron and Global Crossing are synonymous with fraud, but small businesses are vulnerable, too.

Minimal procedures for small businesses to prevent fraud



Do not allow the same employee to keep books, collect funds, write checks and reconcile the bank account.

Have the monthly bank statement delivered unopened to the owner, who should review it for unusual transactions such as declining deposits and unfamiliar payees.

Consider an annual independent review of the cash accounts and bank statements by an anti-fraud specialist.
Source: 2002 Report to the Nation on Occupational Fraud and Abuse by the Association of Certified Fraud Examiners


"Almost every small business you walk in, there's opportunity for the business to be defrauded and the owner not to find out," said Charlie Rafferty, a certified public accountant, certified fraud examiner and certified valuation analyst at GranthamPoole in Jackson.

The average scheme in a small business causes $127,500 in losses, compared to the average scheme in a large company that causes $97,000 in losses, according to the Association of Certified Fraud Examiners. Certified fraud examiners are CPAs trained to detect fraud and assist in procedures that could prevent it.

Last year, occupational fraud and abuse cost businesses an average of six percent in lost revenue, according to the association. It amounted to $600 billion a year, double the amount it was six years ago.

Owners of small businesses often consider their employees as family and find it difficult to believe they could be tempted to steal petty cash, abuse an expense account or set up a phony bank account to embezzle money, said Bryan McDonald, a certified public accountant, certified fraud investigator and certified valuation analyst at Horne CPA Group in Jackson.

Fraud typically occurs when an employee has a need for extra money, finds an opportunity at work to secure the cash and, many times, rationalizes taking the money with the idea of paying it back before the loss is detected, he said.

Many small businesses lack adequate employees to segregate their duties, but controls to prevent abuse are still possible — and they're not expensive to implement. Preventive measures range from not letting a bookkeeper use a stamped signature on checks to having customers send payments to a bank lockbox and having the bank handle deposits.

"You can reduce your risk dramatically if you keep the cash away from people who have responsibility for customer accounts and reconciling bank statements," Rafferty said.

Walt Clark, owner of Clark's Cleaners, with seven locations in the metro area and 42 employees, said he's had employees steal money — and that's not uncommon in small businesses.

"Usually when you bring it to their attention, they'll quit and not file unemployment or a grievance," he said.

Clark said he's tried to put checks and balances in place to curb fraud and he also pays for small business employee theft insurance.

Rafferty said he once did a surprise count of petty cash at a business with no particular suspicions in mind. "Before we conducted the count, someone confessed to taking $500," he said.

Ralph Ross, senior tax partner at Smith Turner & Reeves in Jackson, said his firm once found a situation where a bookkeeper wrote a check to pay American Express for the business — and also wrote a check to pay her own American Express. It went undetected until the business owner opened the bank statement and began questioning the two checks, he said.

Rafferty said there are more schemes to defraud a business than he could name, but a certified fraud examiner can suggest preventive measures and also perform audits when there is suspected wrongdoing. The Association of Certified Fraud Examiners lists 15 members in Mississippi on its Web site.

Many accounting firms will have at least one certified fraud examiner and typically combine that person with a team of CPAs to detect fraud, Ross said. A CPA can suggest measures to prevent fraud but many times may focus on one particular aspect of a financial picture such as income tax, he said.

Communication is key to prevent fraud, McDonald said.

"You want to have an environment where employees feel comfortable communicating with management," he said. "Another key is asking employees during annual review time, 'Are you aware of potential misuse of the firm's resources?' There are employment law issues with that."

Many times employees do report fraud suspicions after another employee suddenly begins spending money in lavish ways and they can't determine where it came from, Rafferty said.

McDonald said he suggests businesses investigate the possibility of using a fraud telephone tip line so employees can anonymously report wrongdoing.

"The studies show that the overwhelming majority of occupational fraud is suspected by someone in the organization," he said. "The difficulty is you have to consider the motives of the person reporting, and some may not be legitimate. You may have someone out for revenge."

Preventive measures can go a long way, Rafferty said. "Usually, we get a call from someone saying, 'I know I should be making more money, but I don't know what's happening. My bookkeeper just left me after being with me 15 years.' "

When fraud is suspected, many businesses want to rush in immediately but that's the wrong way to proceed, McDonald said. "You want to gather information and confirm a pattern of behavior and then move forward," he said.

Rafferty said it's not uncommon for fraud examiners to encounter employee resignations.

"I walked into an office at 9:30 one morning and at lunch time the office manager left a resignation letter and never came back," he said. "They knew we were there to look at the internal fraud structure and check the exposure risk because someone might be taking money from them."

http://www.clarionledger.com/news/0403/27/b01.html