Small businesses: Address fraud, prevent problems with these steps

Sept. 26, 2018

This paid piece is sponsored by Cain Ellsworth & Company LLP.

Fraud can be devastating to any business, but especially to a small one with limited resources.

And unfortunately, cases of it appear to be growing.

Cain Ellsworth’s Abby De Zeeuw is passionate about helping clients protect themselves from fraud. She joined Cain Ellsworth in 2001 and leads the property and casualty insurance team.

While she spends much of her time working with the firm’s many insurance clients to help them find solutions to their business issues, she’s a trusted resource to all industries when it comes to safeguarding businesses.

What types of services do you offer Cain Ellsworth clients?

We primarily work with small-business owners. We’ll look at what controls the business has in place, where there may be gaps and areas where controls can be strengthened. There are also options for outsourcing services to Cain Ellsworth. Payroll is one area where fraud occurs. The bookkeeper will give himself or herself a raise or bonus, and nobody knows. We can take over the payroll processing or even the bookkeeping to provide some additional security

After we sit down and assess where the company is from a control perspective, we can issue a formal report on certain controls and provide recommendations on ways to prevent fraud.

I feel like in the last year there’s been more demand for the services. The economy is good, but this doesn’t happen overnight. It starts small and builds over time until eventually they’re caught.

What are some common challenges you find businesses encounter when it comes to fraud?

For small businesses, it’s just not having enough people. You’ve got the owner and the bookkeeper, so trying to segregate those duties to prevent fraud is difficult. The owner has to be more involved in the oversight of the accounting function. We had one instance where an employee was using a company credit card for personal expenses, and no one was looking at the statement. If you look at the stats, fraud typically isn’t uncovered as the result of an audit. Often, it is because of a tip or a whistle-blower. Not that an audit isn’t a valuable tool, but it’s not meant to find fraud. You could have someone in place who is really good at covering up the fraud.

What are some signs that fraud might be occurring in a business?

We call it the fraud triangle: They have opportunity, they have motivation, and they can rationalize their actions. If you look at their lifestyle, if they’re living beyond their means or has something changed, that could be a warning. Maybe they’re experiencing personal financial stress because a spouse lost a job, they’ve got medical bills, or they’re sending a kid to college. They rationalize the fraud by saying they’ve worked really hard or deserve the money. Sometimes, they call it a temporary loan, and then they rationalize that they’re owed it. Lately, whether it’s in the news or clients, it appears that it’s more prevalent. Unfortunately, a lot of this has been happening for years, and it’s just come to the surface.

Another sign might be an issue with cash flow. The business may have good sales, they feel like they’re making money, they don’t really have debt, and they don’t understand why they don’t have more cash. They need to be asking questions. Hopefully, they’re also looking at financials from a historical perspective. Typically, without an extraordinary event or significant growth, financials will be fairly consistent. Pay attention to inconsistencies or significant swings in financial information as this could be another sign.

If you notice these or other signs, what should you do?

Investigate before accusing. You want to make sure you have your facts straight and gather enough evidence. There may be a legitimate reason a fluctuation is happening. You can call your CPA or a trusted adviser to talk through your concerns. If you really think there’s something going on, there are experts who can provide a forensic audit, and we help connect clients to those resources. You also need to seek legal counsel, whether you press charges or not, to fully understand  what your options are.

What about proactively protecting your business from fraud? Are there some safeguards that should be put in place?

Segregation of duties is a big one. Try not to have one person who can take a transaction through the whole cycle. They get the mail, they open the mail, they deposit the funds, and they do the bank reconciliation. One person would be able to manipulate these transactions, and no one would know. If there’s an employee who pays the invoices, make sure they don’t also sign the checks. That’s a good place for the owner to step in.

Owners should review the bank statement. They should have a pretty good idea of expenses going through there, and it’s helpful if that gets sent directly to them.

Make sure you’re also reviewing credit card statements. Someone that’s not directly involved in the purchasing or expense process should be looking at them.

You can buy insurance to cover employee dishonesty to provide some protection in case fraud does occur.

And the tone at the top is important – make sure management is setting the tone about the importance of integrity and ethics, and we have processes in place to be looking at our financials.

If business leaders would like to learn more about the services you offer, what should they do?

They can call our direct line at 605-610-4611 and can go to our website. Many times it begins with a conversation to see how they’re feeling and what they think is going on before we can really point them in the right direction.

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Small businesses: Address fraud, prevent problems with these steps

Fraud can be devastating to any business but especially to a small one with limited resources. And unfortunately, cases of it appear to be growing.

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