Bank On It

by Gary Avery, Chittenden Bank

Preventing Fraud in Your Business

Most business owners are not as rigorous as they could be with their security precautions. Although many argue that they have to focus their attention on running the business, neglecting the potential for internal fraud can be very costly.

According to a 2003 Better Business Bureau report, 6 percent of all revenues are lost to occupational fraud. The average scheme in a small business causes $127,000 in losses, while fraudulent activities at larger companies average $97,000. The chances for complete financial restitution are low because the person who committed the crime usually has very few assets.

Fraud and embezzlement can happen to any business, whether the employee has been with the company for four weeks or 40 years. Typically, the person thinks that stealing is the only option. Employees can siphon off funds out of a sense of entitlement, so pay close attention to signs of stress and changes in behavior, including drug use.

Use common sense, and exercise due diligence for both technological procedures and personnel issues, to protect your business. Make sure you have financial controls in place — and adhere to them — to keep your assets secure without locking everything down.

Procedures

Consider check fraud. If blank checks are left unattended, it can be tempting for some — both new and long-time employees — to swipe blank checks for personal use. Checks usually disappear from the bottom of the pile so they go unnoticed for months.

Make sure that blank checks are securely stored, ideally with dual-access controls so two people are needed to authorize a check. Consider purchasing a computer program to print checks from blank stock, which will further reduce the temptation.

Do you review and reconcile your bank statements when you receive them, making sure they match your financial statements? According to Vermont statute, you have only 30 days to challenge any unauthorized debits, checks or adjustments.

Ask your bank if it offers Positive Pay, which allows you to review checks online before they are posted to your account. Checking the service daily can stop fraud before it impacts your business.

Setting up controls on accounts-payable activities can help prevent improper wire, check or automated clearinghouse payments. Use a well-established financial institution for automated clearinghouse and wire transactions, including a secure electronic transaction system requiring dual sign-off. When accounts-payable duties overlap among employees, the shared responsibility reduces the temptation to defraud the company.

Some banks have installed fraud detection systems to track the company’s financial habits and assign a risk value to each transaction. The bank’s fraud team reviews unusual activities and contacts the customer to validate them.

Personnel

One of the most important security measures is to set up clear policies for your employees to follow when handling funds. Documenting these procedures, training employees on them and enforcing them can help prevent fraud while reducing the temptation to steal.

Once the guidelines are in place, however, don’t forget about using common sense.

Encourage employees to use direct deposit for paychecks to eliminate the risk of printing and cashing of “live” checks. If an employee’s paycheck is lost or stolen, make sure he or she knows to notify payroll immediately.

Unfortunately, few businesses thoroughly screen new employees. There are agencies that specialize in conducting reference checks, usually for less than $200 per applicant. Once the applicant signs a waiver, the agency can do credit and criminal-record checks. Screening for drugs — when hiring, and annually — is a wise precautionary measure.

Running a small business in Vermont can be challenging, but with the right systems and safeguards, your hard-earned income and profits can be preserved. •

Gary Avery is vice president, manager of security and security systems, providing physical security and fraud prevention/recovery systems for Chittenden Bank.