Small businesses are particularly susceptible to fraud as these companies have fewer resources and less segregation of duties. Many business owners are forced to rely on a single employee to be responsible for most of the accounting duties and many times and put too much trust in that employee because they have been with the organization for many years.
Business owners know that fraud risks are out there, but many are not prepared to recognize and lessen the impact of fraud. The best way to prevent and detect the risk of fraud is to recognize the threats of fraud that are significant to your business.
Common employee schemes include creation of, and payments to, fictitious vendors; charging personal expenses on procurement cards and payment of inflated or fictitious invoices. Protecting against these risks requires not only physical safeguarding controls, but also periodic detective controls such as examination of canceled checks.
A fraud risk assessment can be achieved through performing brainstorming sessions with management to discuss potential fraud schemes and scenarios. A fraud risk outline should be developed which includes each financial process, a list of possible fraud schemes and scenarios impacting the process, and a detailed account of all controls in place to prevent or detect fraudulent activity.
Once the fraud risk outline is developed, management can evaluate the effectiveness of the stated controls to mitigate the fraud risks. This outline provides you the ability to analyze and identify areas where additional anti-fraud control improvements should be implemented.
Completing a fraud risk assessment will increase the overall level of fraud awareness throughout your business.
Posted by Drew Ulmer, CPA