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Internal Controls: How your bank can help your company prevent employee fraud

An estimated 42 percent of small businesses get hit with some type of employee fraud, but only about 2 percent of those businesses report it. That’s because the perpetrator is often a close family friend or trusted individual, making the fraud too painful or embarrassing for the employer to report.

That’s why Quinn Roosendaal, vice president and BSA officer at the Bank of American Fork, says trust is not an effective accounting control, whether you’re working with a family member or close friend. But small businesses have it rough because they often don’t have the luxury of fully staffed accounting departments to manage the finances.

Roosendaal recalls an elderly gentleman who owned a chain of convenience stores. The stores dealt with a lot of cash, but rather than depositing the money in the bank and then making a withdrawal to refill each store’s ATM machine, the owner trusted his employees to remove money from the cash deposit each day.

Eventually, one of his employees started removing more money than was necessary to refill the ATMs. The fraud was ultimately discovered, but not before the employee had taken approximately $75,000—a hefty loss for the small business to absorb. The owner was far too trusting and lost track of the paper trail, says Roosendaal.

Employee fraud often happens in the accounting or billing areas of a business, where check tampering, skimming, billing fraud and expense reimbursement schemes are easier to carry out and cover up. So this is precisely the area where your bank can help to establish internal controls and systems that will help prevent employee fraud.

Creating oversight

Zions Banks’ Philip Thompson, senior vice president, treasury management operations, says your bank can help you establish best practices, such as separating accounting duties and setting internal controls that work even for small businesses with limited staffs.

One such control is to ensure that the same person doesn’t have the ability to initiate and approve transactions. In a best-practice situation, he says one employee might initiate a transaction that the owner would have to approve. Or, if the business is sufficiently staffed, one person would receive payment requests, a second would process the payments and a third person would do the reconciling.

“The employees can perform other functions, as well, but would have to split up the accounting work,” adds Roosendaal.

Thanks to the evolution of online banking, it’s much tougher to doctor bank statements, ledgers and check images. What’s more, online banking makes it more convenient and efficient to establish internal controls. For example, a business owner can login and review electronic bank statements and check images to make sure they are valid and keep a close eye on financial transactions.

“That’s something we encourage small business owners and managers to do often, regardless of how involved they are in accounting functions,” Roosendaal says.

As for cash receipts, it’s a best practice to have one person put the bank deposit together, while another person takes it to the bank and another verifies the deposit afterward. Even in a very small business, by using online banking the person that put the deposit together could check later that day to ensure that what got deposited at the bank was the same as the original deposit amount.

“That seems like a small thing, but that one control measure could really make a huge difference,” Roosendaal explains. “If the person who took the deposit to the bank were to remove some cash or checks, it would be readily apparent.”

Seeking help

Thompson says the business’ bank representative can offer ideas about how to set up internal controls and authorization levels that prevent employee fraud and make the organization stronger regarding all bank transactions, including payment limits and the ability to do ACH origination or wire transfers. Access rights, transaction privileges and authorization levels can be controlled to the granular level to manage how much an individual employee can see and do with a business’ online financial transactions.

“I mean, really granular,” says Roosendaal. “Your banker can help determine everything from who can compose a wire transfer or build an ACH batch to who is authorized to approve the batch or wire before it can be processed.”

With the assistance of your banker and a few simple steps, your company can implement controls and best practices that eliminate the temptation for a “trusted” employee or friend to commit fraud. Furthermore, the banker can help ensure that risk mitigation is in place to add greater peace of mind.