Recession equals risk Featured

8:00pm EDT September 25, 2009

In these difficult economic times, businesses are streamlining their employee base and, at the same time, could be shrinking safeguards, as well. By eliminating or trimming certain key staff, companies could be putting themselves at risk from reduced management controls.

Employees may be facing severe pressure in their personal or professional lives through foreclosures, bankruptcy, layoffs and failing businesses. Your employees are impacted and that puts your business at risk.

Smart Business learned more from Angela Dotson, CPA, senior tax manager at Habif, Arogeti & Wynne, LLP, about overcoming recessionary risks to protect your business from fraud.

What businesses have the highest risk of fraud?

According to the Association of Certified Fraud Examiners, small businesses are the most vulnerable to occupational fraud because financial responsibilities in smaller companies are typically only handled by a few people, or even one person. Smaller companies tend to have ‘trusted’ longtime employees that have access to assets and information that provides an opportunity to both commit and conceal the fraud, whereas larger businesses with an internal audit department have a lower risk of becoming victims.

What causes an employee to commit fraud?

The three key elements in what is known as the fraud triangle are opportunity, pressure and rationalization.

Opportunity is the person’s ability to commit fraud based on his or her level of access to company information. Pressure can be brought about by medical bills, expensive tastes, addiction problems and any other significant financial need. Rationalization is when the individual justifies stealing from the company, since oftentimes the employee intends to replace the funds in the future. The typical fraud is committed by a first-time offender under extreme pressure and is usually uncovered via tips or accidental discovery. As a precautionary measure, business owners should be proactive and develop a climate that is hostile to fraud.

What can companies do to reduce the risk of fraud?

Business owners should implement strong internal controls to minimize opportunities to commit occupational fraud, but first, they need to identify areas where abuse is likely to occur. One of the most common types of abuse is asset misappropriation through disbursements and skimming.

The following questions and suggestions should be used by business owners in reviewing their internal controls and determining which areas require further action:

  • Who is responsible for receiving cash, disbursing cash, writing checks, signing checks and reconciling bank accounts? To reduce the risk of fraud, the duties should be separated.
  • Do you require two signatures for checks over a certain dollar amount?
  • What controls do you have in place over noncheck disbursements such as wire transfers and debit memos?
  • Make sure that employees with cash disbursement and bank reconciliation duties are required to take vacation, and have other employees trained to perform their functions when they are absent.
  • Blank checks should be kept in a secure location. All voided checks should be canceled and retained.
  • The person performing the bank reconciliation should not receive the bank statements directly.
  • The statements, along with enclosures, should be viewed by another appropriate person on a monthly basis.
  • Disbursement checks should be prepared after they are matched to proper supporting documentation and have been formally approved.
  • Pay close attention to the vendor account numbers as you and your employee could have outstanding invoices with the same company (i.e. credit card or cell phones).
  • The person(s) responsible for preparing payroll should be independent of other personnel duties such as timekeeping, distribution of checks and hiring employees.
  • There should be restricted access to blank payroll checks.
  • Are pre-numbered payroll checks used, the sequence accounted for and unissued checks controlled?
  • Do you reconcile the payroll register and the general ledger to gross and net pay amounts per the payroll tax returns? There should be a periodic review of the payroll register compared to the budget for the year and any variance explained.
  • Do you have adequate timekeeping and attendance records to prevent abuse by employees?
  • Have you verified that your payroll taxes are actually being remitted on a timely basis?

What if your company does not have enough staff to separate all the functions?

Discuss your concerns with your CPA. Consider having him or her review your financial statements and various components on a regular basis. Work with your CPA to determine what functions would be appropriate to outsource to his or her firm. Your CPA can help you identify and assess your internal controls and help develop solutions that will work for your business.

Insights Accounting & Consulting is brought to you by Habif, Arogeti & Wynne, LLP

Angela Dotson, CPA, is a senior tax manager at Habif, Arogeti & Wynne, LLP. Reach her at or (404) 814-4981.