Preventing Fraud in Small Companies

Original article by Partner, David Kirkup

Embezzlement is not just happening to rich investors, and is arguably rife in small growth companies. So how do you protect yourself against dishonest employees? If you ever read up on fraud practices, which I do, then you know there are a dizzying array of potential ways you can be ripped off. In turn, the professionals prescribe hundreds of “simple” procedures, controls and protocols to help you head them off.

However, in the real world business owners have limited resources, they have to place trust in individuals, and they need to devote the bulk of their time to growing and building value in their business. So here’s a list of fraud checks you can work on right now.

1. Procedures Manual: Develop a simple accounting procedures manual that lays out duties, responsibilities, and processes? It does not have to be elaborate, but a published policy makes it harder for employees to disguise bad procedures, or hide transactions.

2. Oversight: Practice a regular oversight process to identify potential areas of fraud. Review the customer and vendor lists to check for unknown or similarly listed names; review the monthly payments register and check for large amounts, small regular amounts, unknown vendors etc.: and insist on timely bank reconciliations.

3. Outsource Payroll: Use ADP, Paychex or others to do your payroll processing. There is more opportunity for fraud with internal payroll – and it’s a waste of book-keeping time. Even worse you will be on the hook if the government goes short to pay for your accountant’s second home.

4. Insist on timely and accurate financial statements, and have your accountant explain monthly variances in profit margin and overhead amounts. Look at your balance sheet and ask for explanation of Asset and Liability balances with generic names.

5. Observe the signs: It’s a cliché that the devoted employee who never takes a vacation is likely on the take, but there are other signs you should look for. Signs such as extravagant lifestyle, lots of pay advances, creditor calls at work, unusual changes in habits or behavior, sloppy work habits, more sick time, lots of overtime, evidence of drug, alcohol or family issues. These could all be evidence of personal turmoil leading to fraud.

6. Credit checks: run occasional credit checks on key employees – permission should already be on file – and look for changes indicating financial pressure.

7. HR Policies: Makes sure employees are aware that fraud is not tolerated and that guilty parties will be prosecuted. Make employees aware that suspicious activity can and should be reported.


If you have an inventory business then there are further measures you may need to take to control high value merchandize and materials. Many embezzlement schemes run for years and extort $10s and even $100s of thousands from a company.

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