When you sense danger, trust and act on your “gut response.” For example, if you see an employee furtively slide one sheet of paper beneath another when you walk into the room, or he can’t give you logical answers when you ask specific questions, or she acts defensive when you look in her desk for information you need, don’t ignore your sense of unease. Investigate. Control Your Environment You’d plan ahead so you wouldn’t have to walk alone through a dangerous part of town at 2 a.m. Likewise, think ahead about possible fraud scenarios so you can avoid or detect them. For each asset at risk: - Consider how it could be used improperly or illegally. Blank checks are but one example of such an asset — it could be easy for someone to steal and use some of your blank checks.
- Re-evaluate current risky practices. Do you store your blank checks in a box next to the printer?
- Develop effective prevention techniques. Store your back stock of blank checks in a locked, fireproof filing cabinet and lock limited quantities of your current check stock in a secure drawer in the accountant’s office.
- Practice backup and contingency plans. What do you do if someone needs to pay for a delivery and the checks are all locked up?
- Monitor usage. To keep tabs on your blank checks and ensure none are missing or used improperly, try keeping back stock in security-sealed boxes, periodically counting current check stock, using manually-prepared check number/approval logs and performing interim and/or immediate bank reconciliations.
- Prepare your weapons. Develop procedures to recover the asset if it has been used fraudulently or if its security has been compromised. Here are some steps you might take if anyone has left some blank checks lying around or you discover some are missing:
- Immediately contact the bank to see if the checks have cleared; make a stop-payment request if they haven’t and file a police report for stolen checks that have cleared the bank.
- Meet with the bank’s security officer to determine the next steps.
- Change bank accounts.
Many other assets are at just as much risk as those blank checks. You should apply the six steps outlined above to all your vulnerable assets. Don’t Look Like a Victim Here are some examples of business weaknesses that contribute to fraud or allow it to occur quietly and undetected over time: - Incomplete or inaccurate financial reporting
- Not comparing planned job costs, sales or company performance with actual outcomes
- Checkbook registers that aren’t accurate or aren’t reconciled with bank statements
- Bills regularly paid late
- Financial transactions delegated to others with little or no supervision
- Missing, disorganized, cluttered or inefficient documents and filing
- Letting everyone know that, “Sue always handles all of the paperwork”
- Company owner and/or management ignoring financial reports or the “numbers side” of the business
If any of these conditions exist in your business, you’re at high risk for fraud. Don’t make the situation worse by advertising these financial weaknesses inside or outside your company. You may need immediate, qualified professional assistance to put effective financial controls in place. Then you can begin to work from a position of true (vs. perceived) strength and internal control. Act Quickly, Find Help, Fight Smart It’s one thing to know you’re vulnerable and another to suspect you’re in actual, immediate danger of losing assets. If you have any evidence of even a minor problem, don’t wait to take action. Many frauds seem insignificant when discovered, but few are actually as small or innocuous as they first appear. Here are pointers for developing an action plan: - Maintain a friendly, professional demeanor with all employees.
- If you suspect an employee of wrongdoing, do not immediately confront him on your own or dismiss him; you may encounter a variety of legal pitfalls.
- Contact your attorney, CPA and perhaps an information technology consultant within 24 hours of discovering or suspecting fraud. Ask them for advice on how to:
- Obtain information from the employee.
- Handle the employee’s dismissal and exit from your premises.
- Secure your premises and computer data (Note: If you believe the employee’s computer was involved, do not turn the computer on or off or do your own searches. You can easily destroy evidence that an expert could extract).
- Safeguard evidence (e.g., on computers) and determine the full extent of the loss.
- Protect yourself from potential lawsuits or other fallout.
- Determine whether or not to press charges. Consider the time, stress and money required.
- Try to obtain restitution.
- Present the situation to other employees.
Do not try to resolve the problem yourself. You don’t have the expertise to handle it and may make the situation worse or do something that doesn’t produce good long-term results. Instead, ask your professional advisors how to proceed. Unfortunately, you never really “win” when you encounter fraud or any self-defense situation. The best you can do is to cut your losses as quickly as possible and avoid more bloodletting. That’s why front-end prevention is so critical. Diane C.O. Gilson, CPA, CIA, is a Certified QuickBooks ProAdvisor and MasterBuilder ProAdvisor, author, trainer and construction accounting coach, as well as a frequent speaker at The International Builders’ Show and The Remodelers’ Show. Her firm, Info Plus Accounting PC/CPA, offers bookkeeping and support services to help construction companies do more accurate and timely job costing and run better management reports. Contact Gilson via e-mail, or call her at 734-544-7620. Earlier Articles in this Series - To read, “Protecting Yourself From Fraud: An Introduction,” Part 1 of this series, published Dec. 15, click here.
- To read, "Are You at Risk? Protecting Yourself From Fraud," Part 2 of this series, published Jan. 26, click here.
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Several years ago I took a basic self-defense class. I learned effective combat skills, but the most valuable lessons I learned concerned: 