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How to prevent fraud from happening within your small business.

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Fraud is a major concern for many businesses, not least of which are local small businesses that deal in cash, or are too small to pay for an adequate accounting staff, or even worse, cannot afford to delegate tasks to more than one employee.  After pouring your heart and soul into a business, succeeding against external economic forces and carving a niche for your business, the last thing a small business owner needs to deal with is the theft of their hard-earned money after it has found its way in the front door.  

Detecting fraud is often considerably more difficult than it sounds.  Even the most passionate small business owner may have a difficult time believing that a trusted employee is stealing from them.  

The human element of fraud is one of the hardest aspects to understand because we want to trust each other and those that we have worked closely with and handed responsibility in an effort to increase the quality of life for our loved ones and ourselves.  This idea may seem to stray from the topic of accounting because the idea of “internal controls” is often bandied about to ensure that fraud does not occur.  

Internal controls are the policies and procedures enacted by a business to safeguard against fraudulent activity.  While it is absolutely true that internal controls help diffuse the ease with which a person with bad intentions can perpetrate fraud, they do not always provide small businesses with the protection they need.  Using an internal accounting policy is not often enough to discourage a determined criminal.

Bringing a CPA into the fold or hiring an outside firm to provide bookkeeping services is one way to remove the element of temptation away from potential committers of fraud.  The objective approach of an outside bookkeeper removes the ability to commit fraud from within the organization.  CPA firms have the ability to identify patterns that may indicate fraud has been occurring and can bring such a finding to the attention of the business’s owners, using information that will remove any doubt to what is actually happening.  

A CPA is trained to “follow the money” and thus is in a position to ably question the trail that may have been created, question the amount of sales against the cost of goods sold, and identify potential areas of temptation, among many other things.  

For example, suppose you are a takeout restaurant that deals with a lot of cash transactions.  Your costs may not change month to month, rent, utilities, employee wages, and of course, food expenses, but perhaps revenue has steadily declined.  There are reasons for this other than fraud, but it is possible that an employee is pocketing cash transactions for themselves.  Detailed bookkeeping provided by a CPA can help identify this occurrence and the amount that employee is stealing from you.

Most small business owners have no reason to suspect fraud is occurring on their premise but hiring a CPA firm to perform its own review of practices and provide bookkeeping services are a powerful tool you can use to protect yourself and your interests. 

If you would like to discuss any potential areas of fraud in your business or see if an outside bookkeeping service is for you, please feel free to contact me by email or call me at (401) 383-9694 for more information.  We can work together to see how to maximize the security of your livelihood.

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