Home Accounting and Auditing Who is most likely to commit fraud?

Who is most likely to commit fraud?

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It is fair to say that as a business owner, at some point, you will be handing over the keys to your castle to someone. Once that happens, the window of potential fraud opens, writes Dawn Brolin in Accountingweb.

It is very difficult to not trust those around you when they’re hired to do very important jobs. After all, you’re giving them access to money, goods, client lists and more, all of which are the pieces of the puzzle that make up your business, your profits and your lifestyle. I would warn you that the information I am about to tell you may put you in denial, paranoia or even maybe panic mode.

As I have discussed before, fraud isn’t necessarily performed by “criminals.” It’s often committed by regular people for three reasons: They have pressure in their lives, they can rationalise why they do it and they have the opportunity do so. And there are three common culprits: the internal bookkeeper, the purchasing agent and warehouse manager, and partners.

Let’s discuss each of these potential risk positions.

1. Internal Bookkeepers

Generally, these are people who work for smaller companies and are the only ones handling the finances. Usually, the business owner 100% trusts the bookkeeper, who has typically been with the company for a significant amount of time and is the owner’s “right hand.” Most of the time, this person has never committed any kind of fraud in their lifetime (up until now, of course).

Now: I am NOT saying you should not have a bookkeeper in your office or that you shouldn’t trust the one currently working for you. Rather, I am saying, “Listen, implement some simple and free internal controls that will help minimize the risk that they will perform their first crime.” Often, when fraud does occur, it happens to a business owner who acts similar to an absent landlord. By investing in some simple internal controls, you’ll be able to keep track of what’s going on.

2. Purchasing Agents and Warehouse Managers

These positions control your most expensive assets: your inventory and your equipment. Those who oversee maintaining, ordering and securing your inventory and other purchases have the keys to your products.

Think about a warehouse that holds lumber. Lumber accounts for thousands of various items and quantities that are difficult to monitor. Without internal controls in place to detect when inventory leaves the warehouse and why, it’s easy for a manager to decide they need to build a deck and to use your lumber to do it.

Additionally, make sure you take note of employee lifestyle changes. This will help you detect when, say, the purchasing agent creates a purchase order and sends the lumber to another location, such as their house. I’ll talk more about other internal control measures you can take in future articles.

3. Partners

If you are in a business with another person or multiple people, you will want to pay attention to this one. Remember: Regardless of your personal relationship, you are in BUSINESS with this person, so it is important that all partners participate in the financials to some degree. In fact, having a backup CFO to assist you in overseeing the transactions and checking in with the bookkeeper is critical.

I had a case where a partner took his family all over the place on vacations (which cost around $10,000 per trip, no less). The one who was back at the office working and managing the business had no clue. Once we dug through all of the details of the transactions, we discovered over $3,000,000 in funds that were fraudulently counted as business expenses and distributions, all without the other partner’s knowledge.

This often happens when one partner just runs the day-to-day business operations and another just takes care of sales. It’s essential to implement checks and balances so you can follow up with each other. It is important to trust your partner, but verify they are doing what they say they will for the company for your own protection.