The Missing Madoff Millions! How to avoid fraud in your business

Many will have been shocked by the news from the US of the missing Madoff millions - or rather billions. One of the features of this scandal was that a high proportion of his investors knew Mr Madoff personally and trusted him with their money. It perhaps underlines the dangers of thinking you know someone and, in consequence, perhaps not being as careful as one might otherwise be.

Some form of fraud or theft could be happening in your business right under your nose. Are your internal controls strong enough to catch it?

Often small business owners only find out about fraud and theft when it’s too late. And very few businesses are able to fully recover, if at all, from an internal theft. Having good internal controls means you can focus on doing what you do best, building your business.

We’ve seen it in our clients – it’s happened to them, so I’m keen it doesn’t happen to you. It’s generally perpetrated by someone you know well and trust, and in these times of economic pressure, people will do things which are out of character, so you need to be extra careful.

Here is a useful checklist to help you think about the risk of fraud in your business.

Fraud Checklist

Fraud is a potential threat to every company, including small and medium entities. The risk of fraud can be managed. The following is a checklist of simple and affordable measures on managing the risk of employee fraud, including some technology-based measures that can be adopted when the threat of fraud is higher.

Accept the idea that fraud is commonplace and can happen at any business.

Set an appropriate ethical example for employees to follow, and treat them with respect and fairness, including fair play.

Ask your employees to identify ways in which someone could commit fraud at your company and the ways to avoid it.

Develop a code of conduct that explicitly prohibits employees from committing fraud, conflict of interest and other illegal acts. Ensure all employees, vendors and customers get copies of it. Consider having key employees provide annual confirmations of their compliance and have a clear company policy on time and expense reporting.

Adopt a “trust, but verify code”. If you need only one bookkeeper, conduct a careful background check before hiring. Take note of employees who appear to live substantially beyond their means.

Verify the credentials of all new vendors before they are authorised to supply the company. Periodically review vendors to identify possible improprieties.

Make sure all disbursements are properly approved.

Protect yourself against cheque alterations by adopting electronic transfers for large payments, using direct deposit for payroll, placing a financial limit on cheques and implementing up-to-date cheque security measures.

Review original bank statements before your bookkeeper does. Keep an eye out for unexpected overdrafts or declines in cash balance.

Make sure bank statements are reconciled each month and that an expert adviser, such as your accountant reviews the bookkeeper’s work periodically.

If something seems odd, whether it is a disbursement to an unfamiliar vendor or unexpected costs, consider the possibility of fraud.