Reduce Fraud Risk

In the accounting world, reducing fraud risk occurs with segregation of duties: Custody of assets, transaction approval & recordkeeping.  No one person in your business should have access to all three areas of inflow or outflow of cash or other assets.  As a sole proprietor, you have no interest to cheat yourself.  Once your business grows and you start to hire employees, be sure to separate these three duties, because you might find yourself in a situation where someone is stealing money from you or providing you with false reports to cover their tracks.

Be sure to designate the following three duties to three separate employees in your business regarding assets:

  1. Custody of assets
    1. Ask yourself- Who has access to your petty cash box? Who is able to pull out money from your business account?  Who has access to your on-line accounts or credit cards to make purchases for the business?
    1. Set controls to make sure that only the appropriate employees have access to your most important business assets (cash, securities, building access codes/ keys, etc.)
  2. Transaction approval
    1. Ask yourself- Who signs off on the business checks? How many accounts and signers do you have?  Who signs off on orders for company supplies? What limits have you set with these approvers to make sure they do not sign off on just anything?
    1. Properly train your signers and approvers by providing lists of what is acceptable and what is not.  Create limits on the amounts allowed for each request.  Promote researching cheaper options before approving just any purchase and create a paper trail for reasons why a pricier option is better for the company.
  3. Recordkeeping
    1. Ask yourself- Who has access to your financial statements and their support?  How many employees have access to confidential information, such as human resource records?  Once a document is filed, are there appropriate controls to be sure it is in your accounting system?  Are you reviewing balances every month on customers or vendors?
    1. Having limited access to financials and confidential documents will prevent the possibility of your business information from getting into the wrong hands and your data from being misinterpreted.  When in doubt about an account, confirm outstanding balances with third parties to provide more reliable data than just an inside document.

Should you ever be audited, an auditor will first look at your internal controls, such as separation of duties.  With good internal controls, your financial figures become more reliable.  All employees are generally trustworthy, but sometimes sudden circumstances make them act otherwise.  You want to create procedures that will catch mistakes before they get out of control.  By separating the three duties of custody of assets, transaction approval and recordkeeping, you can greatly reduce the chance of fraud in your business.

For more information on internal controls and fraud proofing, see Generally Accepted Accounting Standards (GAAS) published by the American Institute of Certified Public Accountants (AICPA).

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