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Protect Against Fraud in Your Business

Posted on: October 21st, 2020

MLA Companies helps small to midsize businesses and nonprofits with financial management including how to protect against fraud.

In a September study released by  Association of Certified Fraud Examiners, fraud has been observed 77% more by respondents since the beginning of COVID-19.  And 92% these same respondents expect to see fraud increase over the next 12 months.

Financial fraud is among the top issues observed, including payment fraud, and fraud by sellers and vendors.

The foundation for building your business is to protect what you have.  Out of date financial systems, and poor cash controls leave you exposed to employees and other companies who will take advantage of your trust.

The MLA Team has decades of experience with serving private companies.  One thing we’ve learned is it’s nearly impossible to predict which employees may attempt to steal from your business.

It’s easier to minimize opportunities for fraud than to predict or prevent it.

The 2014 Fraud in Small Business Report published by the same Association of Certified Fraud Examiners identified the top types of fraud in businesses with less than 100 employees.

The statistics are telling.  Billing fraud and check tampering were the second and third most common types, only after corruption.  And they are much more prevalent in small businesses than large.

Protect Against Fraud

Business owners and nonprofit directors should randomly check financial reports and information. Backup your data daily so it can later be used to prove fraud.

And while these may seem like commonsense controls, during the daily routine of doing business with people you know and trust, sometimes CEOs and managers may not be as diligent as they should be.

Five ways to Protect Against Fraud in your business:

  1. Beef up internal controls — Segregate duties between employees who maintain records and those with custody of assets. Review payroll before it’s processed, especially for the payroll clerk. Knowing that an independent party will review the financial statements periodically helps prevent fraud.  Set up safeguards for assets such as cash, receivables, inventory, and fixed assets.
  2. Incorporate “detective controls” — These processes are mostly conducted to detect fraud rather than prevent it. An independent person should review the bank reconciliation and test some payments to see who they are made out to.  Company Credit card statements reconciliations should be reviewed and all receipts accounted for.  Controls are better when employees use their own credit cards and submit receipts for reimbursement.
  3. Compare and contrast expenses — Each month’s operating results should be compared to the same month in previous years and to budget, with an explanation of significant variances provided by your financial team.
  4. Insure your business against fraud — Employee dishonesty insurance coverage is inexpensive. Often, maximum coverage is $500,000. MLA Principal Steve Lumley received a quote to increase coverage for a company doing $30 million yearly in sales from $100,000 to $500,000 for less than $1,000 per year.
  5. Reinforce a positive corporate culture — Upper management sets the tone in any organization for behavior that is allowed or disallowed as it pertains to all matters of business, including company finances. An ethics policy is important for every organization.

Having proper internal controls against fraud can save your business or nonprofit not only a lot of money, but the time and distress to untangle the fraud and replace the perpetrating employee.

MLA Companies can help you with all these needs.  We are financial experts, and our experience with finance, strategy and solutions helps you get back to building your business.  For MLA, that’s Business Redeemed.