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Fraud Happens

Guest Blogger: Joel Charkatz, CPA, CVA, CFE

In my prior post I discussed the importance of internal controls as a safeguard of a business’s assets and provided a real life scenario. The case discussed was an excellent example of how a few minutes per month would have saved the company penalties and interest payments to the IRS, untold headaches, and a trip to the precipice of disaster, from which they luckily returned.

I also reported the most recent study performed by the Association of Certified Fraud Examiners indicated the median fraud loss in small business (less than 100 employees) was double the loss in large business. While there may be many reasons for this discrepancy, my experience indicates lack of internal controls is a significant cause of this anomaly.

In the current business climate, many businesses have pared employment rolls, leaving fewer personnel to perform the same or more tasks. As a result, internal controls have taken a back seat to servicing the customer. Even where good solid internal controls were once in place, I generally find the change in personnel has not been accompanied by an evaluation of its impact on the controls of the business.

What can be done? For starters, there are a few simple controls which can be accomplished with very little effort. And whether your business has three or ninety three employees, they will work very effectively.

The first procedure is the simplest – the monthly bank statement(s) should be given to a responsible party, unopened. A responsible party is the owner, owner’s wife or other family member, or someone in the organization that has nothing to do with finance. Typically, we find the owner to be the most credible person for this task. Mr. (or Ms.) stockholder opens the bank statement and looks at each check making sure:

  • the payee is legitimate
  • the amount is not out of character for the payee
  • there are no erasures or other apparent changes on the document
  • the authorized person’s signature is legitimate
  • the endorsement on the back appears correct
  • the address the payment was mailed to is where the vendor is located
  • everything else on the document appears to be correct

An additional function would be to compare the check payee and amount directly into the company’s disbursement system to make sure the payee and amount are recorded in sync with the document. This procedure is generally only performed when a question arises, but it is a good idea to spot check, on an occasional basis, a few disbursements.

The key to protecting any business’s assets is internal controls. While small business may see this as a challenge, the fact is the smaller the operation, the easier it is to exert control over the assets.

Joel Charkatz, a Shareholder with KatzAbosch, has served the Maryland business community for more than 40 years. He is Chairperson of the firm’s Business Valuations & Litigation Support Group and a member of the Medical Practice Services Group.  He is also the past Chairperson of the Maryland Association of Certified Public Accountant’s Business Valuation, Litigation, Fraud and Forensics Group. Mr. Charkatz provides a full range of accounting and tax services for clients including business valuation, forensic accounting, litigation support/expert witness, real estate development, management advisory services to closely-held businesses and tax planning.

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