Protect your small business by instituting internal controls — Part 1

Donovan Reed, EVP – Chief Lending Officer

For most small businesses, just trying to compete in the marketplace is enough to think about without worrying about fraud or embezzlement. But there are small businesses everywhere, right now, getting scammed by a phony vendor, having money or property stolen by an employee, or suffering other financial setbacks that could have been avoided with the right internal controls in place.

Larger businesses can suffer these same hardships, too, but don’t as often because they can more easily afford reliable security measures, auditing personnel and other defense mechanisms. However, a small business doesn’t have to spend tons of money to reduce its exposure to fraud and theft. Spending a little time and applying a lot of common sense can go a long way.

Here are measures your small business can take to guard against internal and external predators.

1. Institute dual controls. In small businesses, it’s not uncommon for a single employee to be responsible for completing multiple tasks. Failing to properly segregate duties, however, can result in a greater risk of errors or fraud. A dual-control system requires the authorization or approval of two individuals—one being the owner/manager, preferably—to complete transactions. For example, requiring two signatures on checks above a certain amount ensures a second set of eyes on one of your most critical transactions. If the same person signs checks and enters disbursement transactions in the accounting records, it is harder to prevent embezzlement. In general, assigning different people the duties of authorizing transactions, recording transactions, maintaining custody of related assets, and reconciling accounts provides for more effective internal controls.

2. Closely monitor account activity and statements. Reconcile and monitor account activity frequently to identify suspicious transactions. When possible, sign up for online statements for your eligible accounts. This can help ensure accurate, secure record-keeping and monitoring. Conduct routine and unannounced checks on high-risk areas of your business, like your financial and inventory departments. On at least a monthly basis, review key metrics—sales, expense accounts, cash reports, variance reports and payroll summaries—to identify problems that may exist.

3. Keep tabs on inventory. In many small businesses, employee theft of inventory is a real problem, particularly in small restaurants. Taking partial inventory on a random basis will help detect and dissuade employee theft. If yours is a cash business, it is imperative to reconcile cash to inventory as frequently as possible, preferably daily.


For other ways to protect your small business from fraud and theft, see Part 2 of this article.

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