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By Jeanne H. Yamamura, University of Nevada, Reno
Recently an office manager for a local veterinary surgeon was sentenced to eight years in prison for embezzlement. She stole more than $200,000 over a four-year period. During that time, she took lavish vacations, remodeled her home, and bought herself expensive gifts. During the same time, the surgeon worked longer and longer hours, struggling to keep his business afloat.
Small businesses lose money due to fraud every day. In fact, the Association of Certified Fraud Examiners reported in 2008 that small businesses (defined as businesses with less than 100 employees) suffered a greater percentage of frauds AND a higher median loss than their larger counterparts. The median fraud loss for small businesses was $200,000, the largest amount for any size company.
Small businesses often lack fraud-consciousness and tend to have weak or nonexistent internal controls. Their owners feel that internal controls are only for big companies with many employees. But, even small businesses have assets that others might try to steal. They are also particularly vulnerable due to their size and the nature of their operations. As a result, internal controls are not only desirable for small businesses, they are essential.
Internal controls are checks and balances that are intended to prevent fraud, limit losses and reduce errors. Here are three internal controls that any small business owner can implement today:
- First, improve fraud-consciousness. There is no such thing as the perfect, trusted employee. Most frauds are committed by first-time offenders. A lack of internal controls invites frauds to be committed. All it takes is one personal financial emergency or unshareable personal problem, and the trusted employee may step over the line. In the beginning, there is usually an excuse, such as “I’m just borrowing the money and I’ll pay it back.” But once started, frauds are very difficult to stop.
- Second, remember that cash is king and directly monitor cash activity. Receive the bank statement directly, preferably unopened. Open the statement and look at the activity. Does it make sense? Ask questions about anything that seems odd.
- Third, personally approve all new vendors. Fraudulent billing was the most common fraud suffered by small businesses. It involves billing the company for nonexistent services or using company funds for personal purchases. Fraudulent billing can be prevented by approving all vendors and monitoring cash payments.
Internal controls will enable better management of operations, greater control over cash flow and reduced risk of loss due to error or fraud. Implement essential internal controls today.
Jeanne H. Yamamura is professor of accounting emerita at the University of Nevada, Reno College of Business.