Internal Fraud - Tire Review Magazine

Internal Fraud

Almost 60% of all smallbusiness owners have suffered some form of internal financial fraud, accordingto a study by KPMG Peat Marwick, and 75% of those have been victimized byemployee fraud within the past year. That’s a good enough reason for dealers toknow the common warning signs of employee embezzlement or theft.

The two keys are opportunityand need. The employee has to be in a position to perpetrate the theft, andmore often than not has a personal need for the money.

You should know and trustany employee with direct or indirect access to business finances – checkwriting privileges, accounts receivable/payable responsibility, petty cash,etc. At the same time, it doesn’t hurt to have their work reviewed often by anoutside accountant.

Check your internal systemsfor warning signs or flaws that may create "opportunity" for fraud,such as unsupervised check-writing or financial privileges, managers who seemto take little time off, high employee turnover in financial positions, vagueorganizational structures and poor control systems, orunderstaffed/under-supervised accounting departments.

"Need" is the bestindicator of potential financial fraud, but the hardest to detect. Warningsigns to look out for include financial need caused by illness, loss, debt,drug/alcohol abuse or gambling; employees living beyond their means; job orpersonal financial frustration; dislike/resentment of company management;unusual and expensive purchases; changes in your financial positioninconsistent with business; or sudden or unusual changes in internal processes.

There are proven controlsyou can institute that can limit or prevent internal fraud:

• Use safes/locking cabinetsto limit access to checks, cash or financial information

• Limit computer access tofinancial records

• Deposit cash and incomingchecks daily

• Require two actualsignatures (not signature stamps) on every check

• Establish check writingprivileges and dollar limits

• Ask area banks to neveraccept company checks written to individuals, other than payroll checks

• Have one person in chargeof reviewing expense reports, sales commissions and purchase orders/invoices

• Do a more thoroughbackground check on any new employee involved in a financial position

– Source: Tire ReviewBusiness Toolbox

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