As a small business owner, a lot of trust is placed in the most loyal employees. Unfortunately, most fraud is usually committed by those same trusted individuals. According to the Association of Certified Fraud Examiners, nearly half of small businesses will experience fraud sometime during their existence. Some of the fraudulent schemes are easily overlooked, especially if trusted employees have access to check writing and reconciliation functions within the accounting department. Below are some common fraud schemes that we have recently investigated.
Common Fraud Schemes To Guard Against
Over-ordering of Supplies. A former office manager was a trusted employee in charge of keeping track of and ordering supplies. She came to the office early and stayed late, sometimes missing lunch breaks to help out the busy staff. She had a company credit card and reconciled the monthly credit card statement. During her two years of employment, she began purposely over-ordering supplies and then returning them for a credit or gift card. The credit or gift card was used to buy personal items such as non-perishable food or toiletries that she would take home when she stayed late. Because she ordered and signed for the supplies when they arrived, it was easy for her to hide her personal items, thus the reason she would skip lunch to be sure not to miss the scheduled delivery! It was only when the business owner happened to open a box of supplies that contained a gardening set purchased with bonus points that the office manager got caught. She claimed she purchased it so she could grow tomatoes for the business owners! Although the dollars were small enough to go undetected, over time it accumulated to more than $30,000.
Payroll Fraud. Often times, small businesses use a payroll service to process their payroll and taxes. The time-keeping system can sometimes go unreconciled for months. A recent case involved the review of hourly employee records who were working on multiple projects. They recorded massive hours and were getting paid extraordinary overtime. Upon review and reconciliation of the timecards, the employees were “double dipping” and charging for projects that were geographically impossible to be working on at the same time. Because no one had reconciled the timecards to the payroll service reports, it went unnoticed until the owners wondered why their financial results had rapidly declined despite an increase in revenues.
Double Payment Fraud. A small business’s bookkeeper has to inherently be trusted by business owners. They usually have check writing authority and due to a small accounting department, there is often a lack of segregation of duties. One bookkeeper embezzled several hundred thousand dollars by getting approval to pay a vendor an amount over the actual invoice. When the checks were cut, she would write one check to the vendor for a certain amount and another check to herself for the balance of what was approved. The check register and accounting records showed two checks to the vendor for the total approved amount. Due to the fact the bookkeeper also reconciled the bank statements, it was only when the business owner happened to be reviewing checks online when he saw the checks written to the bookkeeper. For many small businesses, it is hard to segregate duties, but under no circumstances should the person writing the checks be reconciling the bank statements on a regular basis.
Don’t let your trusted employees destroy your business. If your financial results don’t look right and certain expense items seem unusual or high compared to prior years with no good reason, have a professional help you get to the bottom of it.
If you’re ready to hire a professional forensic accounting and fraud examination firm to conduct an unexpected review of the financial records or a random on-site visit to determine if financial malfeasance has occurred, contact Veriti Consulting at 800.520.1280 or email us directly for more information about our fraud examination services.
Related Financial Fraud Articles:
- What You Need To Know About The Fraud Investigation Process
- The Ultimate Financial Fraud Examination & Prevention Checklist
