Financial Fraud

Theft by employees and various kinds of financial frauds, cause revenue losses to businesses and are present in every type of business. How can we eliminate the risk of employee theft?

Employee theft can be stealing money from a cash register or embezzlement of funds via fraudulent transactions and file manipulations or stealing goods or misappropriations of funds.

Why employees do this by risking their jobs, risking prosecution and potential jail term? The reason may be complex but the most basic reason is that they think they will not get caught.

The internal controls operating in small companies may be weak, offering great opportunities for frauds. These include:

• False sense of security by the owner believing that their long term employees are loyal
• Lack of time for owners to adequately review and reconcile the books and records of the firm
• Lack of separation of duties
• Employees develop close and long relationship with suppliers / vendors
• Lack of a proper audit trail

We give below a few tips that can prevent you from becoming a victim:

• Be alert of employees who are most likely to hatch an embezzlement scheme or commit a fraud. These persons may have extravagant life styles, heavy debt burdens, commit frequent in-subordination, resistance for internal controls and audits.
• Do not allow employees to control all areas of a transaction cycle. Keep duties separate, keep a vigil on employees who are in control of approving or writing checks.
• Implement the rule that each employee take their alloted vacations particularly your Book Keeper.
• Have your books audited regularly, if possible on a continuous basis or at least, once a year.
• Follow computer security procedures and insist on an audit trail
• Allow only specified employees keep the keys.
• Conduct 'spot checks' yourself. These can be opening the mail, surprise checks on petty cash, looking at the bank reconciliation etc.
• Prosecute those known and proved cases which will serve as a deterent to future cases.
• Obtain insurance cover against the peril of employee theft, forgery or robbery.

With a view to bring down managerial expenses, owners tend to compromise on internal controls or appoint in-experience accounting staffs. Any advantage gained in time savings, convenience and employee perks can be overshadowed by undetected fraud or embezzlement.

Whether auditors shall catch all fraudulent transactions has been open for debate over the years. Normally an Auditor or Business Advisor does not look for fraud when rendering his services. It is the management who is responsible for the prevention and detection of fraud. However, if fraud is a concern when you hire a Chartered Accountant you may address ways to specifically track down fraudulent situations.

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