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May 26, 2017

Welcome Back to week 2 of Finergy's Internal Controls and Fraud Series!

 

Most people are honest, or so we like to believe. We hope that the people we come in contact with in our day-to-day lives are honest and trustworthy.  Unfortunately, we learn over the course of life, that not everybody is honest and trustworthy.  Since we never know who is and who isn’t, it is a good idea to take precautions in your business.  Last week we had an introduction to internal controls and fraud. Today, we are going to look at a few different ways fraud could impact your business.  Next week we will return with a few ideas on how to prevent fraud from happening to you.  If you have any questions always seek the help of a professional, who can give you guidance based on your specific situation.

 

Fraud can either take place internally or externally from your company.  If fraud is happening internally, this means that someone who works within your organization is the culprit.  It could be a manager or employee acting alone or with others.  External fraud takes place when someone from outside of your company commits fraud. This could be a vendor, customer or an electronic source.

 

The motivation for fraud is normally to increase the amount of money they perpetrator has. With internal fraud, the employee(s) may feel disgruntled at the company for not receiving a raise or feel that the company makes enough money they won't notice, or maybe they just feel entitled to the extra money.  Some scams that an employee could do include:

  1.  Falsifying entries – employees who have access to record transactions, whether they are transactions with clients or internal accounting transactions, have the potential to submit incorrect entries.  Errors do happen, and even honest employees can make mistakes. In this context, we are talking about employees who are purposefully creating errors or omissions on the transactions they are responsible for. They then have the ability to take cash or other assets and go unnoticed, since the transactions in the accounting system are not correct.

     

     

     

  2. Falsifying shipments– another area where there is a potential threat is in the shipping and receiving departments. Employees who are receiving orders or preparing orders to be sent out to clients could have the ability to steal products. When an order is received an employee could enter the order in with less units than actual were received, and when sending out goods to a client, the employee sending the order could short the count when packaging. When the employee shorts the count, the accounting system will not show those units, because they have either been sent or weren’t delivered. This means the employee could walk away with the products.

     

     

  3. Unconcealed theft – this is when an employee makes no attempt to hide the theft. They may take cash from the register or goods from the floor and walk out of the store with it.

 

Just like internal fraud, external fraud can happen in many different ways. The basic motivation for the fraud is the same to increase their own economic position. A few examples of how an outside party can commit fraud against your business include:

 

  1.  Phishing emails –  are fraudulent emails that appear to be legitimate.  These emails look like emails from reputable companies.  Typically they ask you to click on a link, and once you do your computer is infected with spyware or viruses.  The sender of the email can now obtain your information from your computer.

     

     

     

  2. Invoices – Vendors may send you an invoice for goods or services that appears accurate when you take a quick glance. On further inspection you may find that the charges aren’t accurate or valid. The vendor is trying to bring in more money than they should be entitled to.

  3. Fraudulent Checks – Customers may pay for goods or services with a bad check knowing the check they issued is not valid. The check may be issued from an account with no money in it,  an account that has already been closed, or an account that never existed.  They have already received goods or services from you, but you will not receive the proper payment.

     

     

 

 

Those are just a few ways people can commit fraud against a small business. As a small business it is important to oversee all aspects of your business and be vigilant about internal controls. A proactive approach will help reduce the potential threats. Check back next week when we look at a few ways to implement internal controls.

 

See you Next week!

 

**We hope you enjoyed our blog.  Please note that the intent of this blog is to provide general information and should not be construed as financial, financial tax, accounting, legal, consulting or any other type of advice regarding any specific facts and circumstances, nor should they be construed as advertisements for financial services.

 

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