Fraud and embezzlement don’t just happen at large companies. In fact, theft may be more common in small businesses because many lack any form of internal controls that may exist in one form or another in larger businesses.
But the good news for small businesses is that effective internal controls don’t have to be complicated or expensive.
The best way for small businesses to battle fraud is a simple segregation of duties framework. With segregation of duties, you have one person responsible for each of three different areas: Authorization of cash expenditures, physical custody of cash and reconciliation of cash expenditures.
Here’s what you need to know:
- Segregate cash disbursements. Only the owner or a designated, trusted manager should sign checks, authorize electronic payments or perform fund transfers. This control has a dual purpose: management sees how the company is spending its money, and the cash disbursement function is kept separate from bookkeeping and accounting. If the same person signs checks and authorizes electronic transactions, and also enters disbursement transactions in the accounting records, embezzlement is much easier to achieve. You can strengthen this function by having solid purchase order policies and having separate functions approving bills. Then the signer of checks can ensure the payment is approved prior to disbursing the cash.
- Segregate control of cash. If customer collections are a regular part of your business, consider having an owner or manager occasionally open the mail before passing it on to accounting. That’s one way to detect unusual transactions before they’re recorded in the company books. Alternatively, you might ask someone separate from accounting to open the mail and prepare a deposit slip. The practice of making daily deposits is also a good control.
- Segregate reconciliations. For companies with limited resources, periodic review of bank reconciliations by someone outside of accounting can provide a mitigating control. Non-accounting personnel performing these reviews will of course need to be trained. They’ll need to understand the risks involved and the types of unusual or unsupported transactions needing further investigation. Cross training staff also helps to ensure continuity of operations when accounting employees take vacations or leave the company.
Segregation of duties can help your company keep track of cash and help prevent theft by an employee before it happens.