Fraud. The dreaded word that none of us are comfortable addressing or discussing, especially when it comes to how it may impact you or your business. But it’s important not to avoid conversations about fraud. Why? Because several studies and statistics support that businesses may lose approximately 5% of their revenues every year due to fraud. And when fraud is concealed, it may continue for years before being discovered. Further, fraud remains a strong indicator as to the failure of a business. Although attempts are made to recover, many businesses cannot overcome the negative impacts both financially and reputationally and are ultimately forced to close their doors within a few years.

So, what can you do to prevent fraud?

First, it’s important to remember that no controls or systems are perfect. Due to limited resources and personnel, opportunity for fraud will always exist. Thus, as technology and the ways of doing business continue to evolve, so too must your control processes and procedures. Periodic and systematic evaluations and assessments of your controls should be designed to mitigate or detect misstatements or misappropriations in a timely manner. So, while a control may not prevent fraud, it will at least detect it quickly so that you can take appropriate action.

Here are a few suggestions we recommend when it comes to preventing fraud:

• Assess Your Business: It all starts with an honest self-assessment of your business. Where are you vulnerable to fraud? What internal controls do you currently have in place? By assessing the nature of your business and where you are most susceptible, you can begin to plan and design internal controls to mitigate those risks.

• Create the Internal Controls: A system of internal control remains the most important deterrent to fraud. Make sure to set clear roles and responsibilities for employees and segregate duties that overlap and create opportunity for fraudulent activity. For example, personnel responsible for paying vendors should not also be reconciling the bank account. Or, personnel responsible for ordering product should not also be signing or receiving the delivery.

• Document Policies and Procedures: Put your policies and procedures into written and approved documentation. Conflicts of interest, fraud reporting and whistleblower protection are a few examples of vital documents to create and share with your employees. Remember, no two businesses are alike and throughout your assessment processes there must be consideration of your specific risks and vulnerabilities. You should also consider the “cost/benefit” relationship of the controls developed. In other words, does the cost of your internal control appropriately match the risk of fraud? Consult your accounting team for help with this step.

• Be observant: Don’t assume that someone you have known for years isn’t capable of fraud. While you don’t want to create a judgmental environment, you also don’t want to let your guard down. Pay attention to your team and make note if someone’s behavior has drastically changed. Open communication among employees and regular check ins with management will help keep opportunity for fraud low.

If you have any questions or would like to know how Cray Kaiser can help you develop and implement internal controls, please contact us today.