Steps Management Should Take in Preventing the Occurrence of Fraud

Most business owners believe fraud will never occur and do not take preventive actions until it has.  Business owners and management need to take preventive steps in preventing fraud before it has a chance to occur.  Here are some basics:

Mail should be handled by an employee who has no responsibilities related to handling or recording deposits.  It is also recommended that all remittances from customers be directed to a lock box.  The owner/management should receive the bank statements directly and review these statements in detail.  If possible, only the owner/manager should be authorized to sign checks.  Do not use a signage stamp.  Never sign blank checks.  Checks, invoices, shipping documents, etc. should be pre-numbered to account for any missing sequences. 

Owner/management should limit access to accounts receivable records, particularly the ability to issue credits.  Only the owner/management should be authorized to charge off accounts deemed uncollectible.  Owner/management should also periodically review the list of approved vendors, being alert to: unknown vendors, vendors with names similar to other known vendors, vendors with no physical address or telephone number, and vendors whose addresses match employee addresses.  Owner/management should either make or personally review and approve all general journal entries. 

Performance targets should be reasonable.  Setting incentive compensation arrangement at unrealistic performance levels may encourage misstatement of financial results.  The owner/manager should always be alert to changes in employee attitudes, behavior and lifestyles.  Matters that may be of particular concern include: dissatisfaction with compensation, lack of promotion, gambling, drug use or excessive use of alcohol, financial distress, infidelity, serious illness, excessive nervousness, and severe stress. 

Uninterrupted vacations for all employees should be required and a schedule of rotation of employee responsibilities should be established.  Rotation of duties provides a strong disincentive to commit fraud and could provide an opportunity to discover fraud that has already occurred.  Furthermore, thorough background checks should be performed on all new employees.