Articles and Columns

Guest column: Clues can help stop fraud in its tracks

July 13, 2010

Do you know fraud when you see it? Most owners want to trust their employees, so talking about employee dishonesty can be uncomfortable and easily avoided. Business owners have enough on their plate as it is and are often not as vigilant as they should be.

Unfortunately, there are ways for employees to steal that employers often do not even think of. A few examples include creating fictitious vendors or employees, stealing inventory, giving an undisclosed and unauthorized pay raise to themselves or to other employees, or taking payment from a customer and applying to a different customer's account.

Motive, opportunity and rationalization are three conditions of fraud, and at least one is present in every fraud situation. Looking at motive first, have any of your employees been going through financial difficulties? What about opportunity? Think about the employee you trust so implicitly that you don't review the financial statements or reports they prepare. Finally, think about rationalization. How certain are you that all your employees are satisfied with their salary and benefit packages?

My recommendation is to review the financial statements, looking for any abnormality or anything that seemed inconsistent with previous statements. If anything looks out of the ordinary, schedule a Fraud Deterrence Audit.

To prevent fraud, I suggest creating two spreadsheets. On the first one, enter the last five years' income statements in dollars and in a percentage of gross revenues. Investigate any significant changes in income and expenses as a percentage of income. On the second spreadsheet, enter the company's balance sheets for the past five years. Compute the accounts receivable turnover and collection days for each year, as well as inventory turnover, and investigate any significant changes.

Reports should be run and reviewed weekly. Take the time to carefully review these reports. If you are not sure how to read the reports completely, ask your certified public accountant. Your CPA will explain what to look for and what the changes in ratios mean.

These are just a few recommendations to get you started. Remember, if you see anything that that seems unusual, look into it. It could save your business.

Carissa Giebel is an attorney with Legacy Law Group LLC. She can be contacted at carissa@legacylawllc .com or (920) 560-4651.

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