Defending Your Family Business Against Fraud

10/26/2017 (Permalink)

Fraud can occur anywhere within a company and the right controls can limit its successful execution.

In a study done by the Association of Certified Fraud Examiners (ACFE), the 2016 Global Fraud Study found that "businesses with fewer than 100 employees, which are in many cases family-owned, experience fraud at a rate of 28.8%, compared to the 19.8% experienced by those with more than 10,000 employees."

Smaller business often suffer more from fraudulent activities. It's more difficult to manage the damage it causes in a $5 million company than a $250 million company. This kind of activity also damages the company culture.

The median fraudulent loss suffered by small organizations is the same as large organizations: $150,000. However, while it is the same number, this number takes up a larger percentage of the small business revenue.

Here are 5 ways to defend your small business from fraudulent activities and enforce internal controls:

1. Segregate financial duties. Create a three-person system of checks and balances: one person opens the bank statements, one prepares the bank reconciliations, and a third reviews all transactions and canceled checks.
2. Stay away from signature stamps. Family and small businesses should require two signatures for any payment over a certain monetary amount.
3. Establish routine checks of payroll, supplier and vendor lists by multiple people within the company. The final payroll list should be reviewed by someone other than the person distributing checks and preparing the payroll, and the list of vendors should periodically be checked for unrecognized names.
4. Educate employees on financial reporting. To increase levels of security, outsource your financial reporting and ensure someone is monitoring for fraud.
5. Every employee — including family members — should understand protocols in a business from expectations to pay rates and benefits. Clear expectations help avoid a power struggle and will clearly define who is double-checking various aspects of the business.

Fraud can happen anywhere. The more you believe it won't happen to your business, the more susceptible you become to it.

Source: 5 Ways to Defend Your Family Business Against Fraud by Bill Kowalski