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March 30th, 2017 posted by David Finkel (Taxloopholes.com Advisor)

Karl (not his real name) ran a successful medical group specializing in elder care in the Midwest. Smart and hardworking, Karl was like a lot of small business owners we know. He was focused on the operational side of his business, in his case the practice of medicine, and didn’t pay close attention to the financial area.

At least he didn’t until he discovered that one of his key employees had stolen over $200,000 from his company. That was his wake up call. I’m hoping that this article is yours.
The statistics are clear on this: (Source: Association of Certified Fraud Examiners)

  • 42 percent of fraud cases happened in privately held companies.
  • The majority of these cases occurred in companies with fewer than 100 employees.
  • The average fraud continuing for eighteen months before it gets detected.
  • The median loss caused by fraud is $145,000, with 22% of the fraud cases globally involving fraud losses of over $1 million.

This is not somebody else’s problem; this is something your company needs to think about.

Here are the “big three” financial control strategies to protect your company from fraud.

Financial Control Strategy #1: Always have two unrelated parties involved in any money flow in or out of your business.

Lower the odds of successful or unreported fraud by involving two unrelated parties in all money flows in your business.

For example:

  • One person who opens the mail, lists all checks received on a spreadsheet, and preps these checks for depositing, and a second, unrelated person who double-checks the math and reviews the deposit amounts before it goes to the bank.
  • One person sets up the ACH payments via your bank’s website for the payables period, and another separate person reviews the payables and then authorizes the ACH payments to go out.
  • One person submits the written expense report, another separate individual reviews and approves it.

The idea behind this financial control strategy is to pair two unrelated staff members on any given financial job so they can be a check and balance for each other. Not only does reduce temptation for fraud as both parties know that the other will likely quickly see any bad behavior and report it immediately, but it also makes it so two people would both have to collude and keep the secret before any serious theft could happen in those areas.

Financial Control Strategy #2: Create permanent footprints in your financial system that cannot be erased so that you always have a clear audit trail.

Examples include:

  • Numbering your invoices and keeping a separate invoice log of who has which invoice number series.
  • Keep checks under lock and key, and have a written check log clearly showing who is in control of and responsible for which check series.
  • Setting up your financial software with individual log-ins for any team member who needs to access that information, with that software to permanently track and log any changes to the accounting and who made those changes. (I also suggest that you require your financial staff to have private, robust passwords that they change at least twice a year, and which they do not leave on a post it note next to their computer monitor.)

What this financial control concept does is make it much more difficult for a person to cover up theft, whether by making it clear who had which checks or invoices, or by keeping a permanent record of who altered what accounting records. By making these things obvious and traceable back to the offending party, you lower the temptation of bad behavior and increase the odds of it being spotted faster.

Financial Control Strategy #3: Show vigilance and actively question things that strike you as strange or out of the ordinary.

As the business owner, it is your responsibility to actively and regularly review the financial records of your business. Sure, you will have financial staff who do the heavy lifting, but you still need to pay close attention too.

Spot-check reports and highlight any line item or general question you might have. Follow up with your staff to get answers. If the answers don’t satisfy you, dig. Listen to that still, small voice inside that sounds the alarm.

At the very least you’ll keep your financial team on its toes and at least thinking that you are watching closely. Most business owners know roughly what the numbers should look like, and what expenses and sales figures makes sense.

If you see something that is out of the ordinary, question it.

By using these three simple financial control strategy’s you can avoid that sickening feeling that Karl experienced when he first learned that one of his key team members had been stealing from him for several years.

If you found this article helpful, then I encourage you to download a free copy of my newest book, Build a Business, Not a Job. Chapter Two shares 35 business controls that your business needs.   Click here for full details and to get your free copy.