minimize, prevent or detect fraud. When I work with owners of small businesses I normally find that, unless they’ve personally experienced prior theft, they have little or no knowledge about:
- How they may be at risk
- How simple frauds are easily perpetrated
- Warning signals (“red flags”) of fraud
- Basic anti-fraud controls
- How to proceed if they suspect or discover fraud in their company
Without this information, small business owners (and particularly those in the construction industry) are exceptionally vulnerable to major loss. Fraud is a quiet, insidious form of theft that can rob you, your employees and your family of your financial security and everything you’ve worked for over the years. It is not uncommon for a major fraud to cause a company to fail. And the criminal seldom makes restitution or goes to jail.
It’s a darn shame — and it needn’t happen to you. I’ve developed this series of business management articles, which will appear in upcoming issues of Nation's Building News Online, to brief you in the following areas:
- Assessing your knowledge of fraud
- Why construction businesses are at increased risk for fraudulent activity
- The power of self-defense strategies (awareness, preparation and action)
- Warning signs and what to do if you suspect or discover a problem
- Analyzing and recognizing the specific risks that your company faces
- The importance and impact of environmental controls
- Preventative and detective controls for bank accounts, credit cards, payroll and employees, purchasing and company costs and computer and accounting systems
- Avoiding identity theft
I’ll include real-life examples of actual frauds and discuss controls that could have prevented the fraud or detected it in its early stages.
A Quiz to Get You Started
The following quiz will get you thinking about your areas of risk (answers are at the end of the article). This actually is the first half of the quiz. The second half will be provided in the next article of this series.
1. Most frauds are committed by (choose one):
a. Smooth-talking, deceptive con artists
b. Long-term, trusted management level employees
c. Sharp, young employees who are new to the job
d. Front-line or field employees with access to assets
2. Which of the following scenarios might encourage the bookkeeper for a small company to
“temporarily borrow” some funds from the company (choose all that apply)?
a. The job duties include:
• Posting deposits and checks to the accounting records
• Creating checks for the owner to approve and sign
• Mailing checks after the owner signs them
• Promptly reconciling the checking account at the end of the month after you receive
the bank statement
• The boss doesn’t understand the accounting reports and seldom reviews the
b. The company owner has a clearly posted “immediate dismissal and report to the
authorities” policy for theft within the company.
c. As a part-timer, the bookkeeper is paid at a very modest hourly amount, doesn’t
qualify for benefits and has some high expenses and several large credit card
3. True or False: The bank will only clear checks that show the name(s) of authorized signers.
4. True or False: The bank checks authorized signatures on checks exceeding $10,000.
5. Your blank checks are stored in a drawer in your bookkeeper’s desk. Without your
knowledge, several checks are removed from the bottom of the box and made payable
to “Pam Wilson.” Your name is forged and the checks are cashed. They clear for a total
of $14,500. Your actual loss is (choose one):
a. $0; because the bank is responsible for any forged checks.
b. $0; because you discovered the forgery two months later while performing your bank
reconciliations and promptly reported it to the bank.
c. $0; because your employee bonding insurance will cover the loss.
d. $14,500; because you were negligent. The checks were not properly secured, you did
not report the theft to the bank within 30 days of receiving your statement and your
insurance deductible is $50,000.
1. b. Why? Because they are in a position to do so and the work of trusted employees is
seldom reviewed or questioned.
2. a. The bookkeeper controls all accounting activities so there is minimal opportunity to
spot fraudulent transactions. And if owners don’t understand or review work, it’s like
announcing that they are putting a large sum of money in a drawer but will never check
to see that it’s all there.
c. Underpaid employees can develop a “they owe it to me” attitude.
3. False. Although a sharp teller might catch a bad signature at the teller window, most
checks are processed by the thousands in batch mode and signatures aren’t
4. False. See number 3. Banks may check signatures on a small percentage of checks
written for large amounts (e.g., more than $5,000 to $25,000, depending on the
bank), but you should always assume that the authorized signature “control” is
5. d. Self-explanatory answer. Banks can require you to notify them of discrepancies within
14 to 30 days. You’ll probably want to check your bank to see how much notification time
you are allowed and then be sure to reconcile within that time frame.
Diane C.O. Gilson, CPA, CIA, is a Certified QuickBooks ProAdvisor and MasterBuilder ProAdvisor, author, trainer and construction accounting coach, as well as a frequent speaker at The International Builders’ Show and The Remodelers’ Show. Her firm, Info Plus Accounting PC/CPA, offers bookkeeping and support services to help construction companies do more accurate and timely job costing and run better management reports. Contact Gilson via e-mail, or call her at 734-544-7620.
'Accounting with QuickBooks Pro®' Available at BuilderBooks.com
"Accounting with QuickBooks Pro® for Home Builders and Remodelers," including a CD-ROM with a trial version of QuickBooks Pro®, is available through BuilderBooks.com. From writing payroll checks to generating up-to-date income statements, this book will help you get the maximum benefit from your accounting system. To view or purchase it online, click here or call 800-223-2665 to order.
Business management publications available at BuilderBooks.com
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