Ways to Protect Your Business From Internal Fraud

There’s a principle in fraud prevention circles known as the 10-10-80 rule. According to the rule, 10% of employees will not steal under any circumstances, 10% will steal at any opportunity and 80% of employees will steal if they can rationalize the act.

Small businesses are especially vulnerable to employee fraud and theft, and they are often less able than big corporations to absorb such losses.

The first step to preventing employee fraud is to screen job applicants carefully. Before hiring a new worker, you should conduct a thorough background review that includes a criminal history check and drivers abstract scan as well as verification of education and credentials, past employment and reasons for leaving, and references.

Consider running a credit check on prospective employees, especially those who will handle money or deal with financial matters. To obtain a credit report, you are legally required to notify job applicants in writing and to obtain their written consent.

In addition to screening employees, always follow these basic accounting controls:

•    Never allow your business finances to be handled exclusively by a single individual.

•    No employee should be responsible for both recording and processing transactions.

•    Don’t allow the person who sends out bills to collect the mail and prepare bank deposits.

•    Reconcile bank statements at least once a month and conduct random audits or have an outside auditor review your books periodically.

•    Make sure all checks, purchase orders and invoices are consecutively numbered.

•    Mark incoming checks “for deposit only” so they cannot be cashed.

•    Require all checks above a specified amount to have two signatures.

•    Never sign a blank check.

•    Sign every payroll check personally.

•    Avoid using a signature stamp.

Follow up personally if a customer says that they have not received credit for a payment.

Open bank statements and examine canceled checks carefully for red-flag items such as missing check numbers. Look at the checks that have been issued, to make sure the payees are legitimate and signatures are valid.

Review accounts payable by checking cash disbursements and payments.

Finally, be clear with employees that your company has zero tolerance for fraud or theft of any sort. Write and distribute a company policy that spells out what constitutes fraud and specifies the consequences. By establishing internal controls and letting employees know that you are vigilantly looking out for fraud, you can prevent many of your employees from committing fraud.

In addition, a positive work environment has been shown to help deter employee fraud. Open lines of communication and fair employment practices will also go a long way in helping to reduce the problem.

How to Read Your Profit and Loss Statement

A profit and loss statement (P&L) summarizes your business’s revenues and expenses over a given period of time – usually a quarter or fiscal year.

A basic P&L lists net revenue at the top, along with primary income sources such as delivering or producing goods, rendering services, or other activities that constitute ongoing operations. Income from sources other than primary business operations, such as rental income, patents or sales of fixed assets, is itemized separately.

The revenue section is followed by various categories of expenses. Operating expenses can include:

•    General and administrative expenses such as management salaries, legal and professional fees, utilities, insurance, depreciation of buildings and equipment, rent, and supplies

•    Selling expenses such as sales salaries, commissions, travel expenses, advertising, freight and shipping

•    Production-related expenses such as raw materials, equipment maintenance and repair, and labor

•    Depreciation for fixed assets that have been capitalized on the balance sheet

Nonoperating expenses are costs that are not related to primary business operations. Irregular items are generally unusual and nonrecurring. They are reported net of taxes.

What’s left at the end – the bottom line – is your company’s net income or profit.