Building a Fraud Firewall: Six steps to help prevent fraud

Small businesses tend to be vulnerable to fraud because they have weak internal controls. Business owners can be too trusting, too busy chasing new business or too short-staffed allowing procedures and systems fall by the wayside.

Internal controls may be less sexy than winning a big contract, but they are just as important to the long-term potential of your business. No amount of sales wins will help if your bank accounts or inventories are being methodically depleted. In this article we look at six ways you can protect your business.

1. Segregate Accounting Duties

By assigning the various steps in your accounting process to different people you not only ensure oversight and catch mistakes, you also prevent fraud. Basically, this approach requires two people to collude to hide a transaction, making theft much more difficult.

You should aim to separate record keeping, authorisation and custody of assets. So, for example, the person who receives goods at the warehouse should not be able to sign the cheques to pay for those goods. The person who sells a product should not be responsible for recording the sale or receiving the payment.

2. Second Signature – even online!

We recommend that, unless you are making all payments personally, you require two signatures on payments, including online payments. At the very least, this should be required on payments above an agreed amount. This reduces the likelihood that someone will write improper cheques to themselves or a fictitious company.

3. Match Receiving Report against Actual Inventory

A receiving report documents the contents of a delivery and should be filled out by the staff member receiving a shipment. All arriving inventory should be counted and inspected and a receiving report prepared to document the quantity and condition of goods received.

The accounts department can now compare the receiving report with the purchase order and invoice and ensure that the business does not pay for items not received or returned as damaged.

4. Surprise Inventory Counts

Predictable controls can be easy to dodge. Rather than simply having a year-end stock count, implement surprise inventory counts at odd times of the year. The element of surprise will act as a good deterrent. If employees know that a stock count could happen at any time, they are less likely to risk theft. If something has been taken, you will know about more quickly than if you wait until year-end.

5. Scrutinise Business Bank Accounts

It’s important to stay in touch with your business bank accounts. We recommend that you have as few bank accounts as possible. If multiple accounts are required, exercise extra caution.

Reconcile your bank accounts daily. Ideally as a small business owner you should do this yourself. Yes, delegation is important. But taking personal responsibility for account reconciliation not only prevents fraud, it helps you keep your finger on the pulse of your business.

6. Have Internal Controls Audited by an Expert

Too often business owners fail to set up internal controls because either they don’t have time to think about it, or they’re not sure where to start.

An excellent place to start is by bringing in an expert to audit your current systems, identify weaknesses and recommend internal controls to protect your business.

HQB’s Fraud Prevention Service is one such option. The service includes a thorough systems audit by one of our 3 ASIC registered company auditors. We physically observe the operation of your business, providing an audit of what’s actually happening, versus what you may think is happening. A Risk & Control Matrix report follows, highlighting the areas of risk and recommending internal controls.

If you have questions about fraud, internal controls or HQB’s Fraud Prevention Service please contact us. Our team is here to help.

Posted 09.10.2019

 This article is compiled as a helpful guide for your private information and is subject to copyright. We suggest that you do not act solely on the basis of material contained in this article because items are of general nature only and may be liable to misinterpretation in particular circumstances. We recommend that our advice be sought before acting on any of these crucial areas.