Every year, companies are looking for ways to improve their bottom line…
However, most don’t realize that the biggest problem at hand, might be right under their noses. According to the Association of Certified Fraud Examiners, most businesses lose around 6% of revenue per year due to employee theft alone. The following tips are designed to help managers avoid fraud within their company…
1 – Segregation of duties – Use a system of checks and balances to ensure no one person has control over all parts of a financial transaction.
- Require purchases, payroll, and disbursements to be authorized by a designated person.
- Separate handling (receipt and deposit) functions from record keeping functions (recording transactions and reconciling accounts).
- Separate purchasing functions from payables functions.
- Ensure that the same person isn’t authorized to write and sign a check.
- When opening mail, endorse or stamp checks “For Deposit Only” and list checks on a log before turning them over to the person responsible for depositing receipts. Periodically reconcile the incoming check log against deposits.
- Require supervisors to approve employees’ time sheets before payroll is prepared.
2 – Accounting – Reconcile agency bank accounts every month.
- Require the reconciliation to be completed by an independent person who doesn’t have check signing responsibilities
- Examine canceled checks to make sure vendors are recognized, expenditures are related to agency business, signatures are by authorized signers, and endorsements are appropriate.
- Examine bank statements and cancelled checks to make sure checks are not issued out of sequence.
- Initial and date the bank statements or reconciliation report to document that a review and reconciliation was performed and file the bank statements and reconciliations.
3 – Restrict use of company credit cards – Verify all charges made to credit cards or accounts to ensure they were business-related.
- Limit the number of agency credit cards and users.
- Establish a policy that credit cards are for business use only; prohibit use of cards for personal purposes with subsequent reimbursement.
- Set account limits with credit card companies or vendors.
- Inform employees of appropriate use of the cards and purchases that are not allowed.
- Require employees to submit itemized, original receipts for all purchases.
- Examine credit card statements and corresponding receipts each month, independently, to determine whether charges are appropriate and related to agency business.
4 – Board of Directors – Financial oversight of agency operations and management.
- Monitor the agency’s financial activity on a regular basis, comparing actual to budgeted revenues and expenses.
- Require an explanation of any significant variations from budgeted amounts.
- Periodically review the check register or general ledger to determine whether payroll taxes are paid promptly.
- Document approval of financial procedures and policies and major expenditures in the board meeting minutes.
5 – Prepare all fiscal policies and procedures in writing – Include policies and/or procedures for Board Approval:
- Cash disbursements
- Attendance and leave
- Expense and travel reimbursements
- Use of agency assets
- Purchasing guidelines
- Petty cash
- Conflicts of interest
6 – Protect petty cash funds –
- Limit access to petty cash funds. Keep funds in a locked box or drawer and restrict the number of employees who have access to the key.
- Require receipts for all petty cash disbursements with the date, amount received, purpose or use for the funds, and name of the employee receiving the funds listed on the receipt.
- Reconcile the petty cash fund before replenishing it.
- Limit the petty cash replenishment amount to a total that will require replenishment at least monthly.
7 – Protect checks against fraudulent use –
- Prohibit writing checks payable to cash.
- Deface and retain voided checks.
- Store blank checks in a locked drawer or cabinet, and limit access to the checks.
- Require that checks are to be signed only when all required information is entered on them and the documents to support them (invoices, approval) are attached.
- Require two signatures on checks above a specified limit. Require board member signature for the second signature above a higher specified limit. (Ensure that blank checks are not pre-signed.)
- Mark invoices “Paid” with the check number when checks are issued.
Managing fraud within a company is a difficult task, but it can be much easier if you use these seven steps. Remember that most internal fraud stems from employees who feel pressured, over-worked, or under-appreciated. Always ask for feedback, but ensure that they know you are serious about enforcing your policies as well.
At Paragon Accounting we’re here to help you establish, review and enforce the internal controls necessary to run your business efficiently. Please feel free to inquire about our external auditing services.
