The best way for small businesses to battle fraud is to create a separation of duties framework. With the separation of duties, you have one person responsible for each of the three areas:

1. Authorization of cash expenditures
2. Physical custody of cash
3. Reconciliation of cash expenditures

Separate cash disbursements

Only a designated, trusted manager should sign checks, authorize electronic payments, or perform fund transfers. This control has a dual purpose: management sees how the company spends its money, and the cash disbursement function is kept separate from bookkeeping and accounting. The opportunity to embezzle is much higher if the same person signs checks, authorizes electronic transactions, and enters disbursement transactions in the accounting records. You can strengthen this function by having solid purchase order policies and separate processes for approving bills. Then the person who signs checks or authorizes transactions can ensure payment approval before disbursing the cash.

Separate control of cash

Have an owner or manager occasionally spot-check incoming electronic transactions and tie them to the company bank account. If you receive physical checks, have an owner or manager open the mail before passing it on to accounting. That’s one way to detect unusual transactions before recording them in the company books. Alternatively, ask someone separate from accounting to open the mail and prepare a deposit slip or daily reconciliation of all transactions.

Separate reconciliations

For companies with limited resources, a periodic review of bank reconciliations by someone outside of accounting can provide mitigating control. Non-accounting personnel performing these reviews will need training. They’ll need to understand the risks involved and the types of unusual or unsupported transactions requiring further investigation. Cross-training staff also helps ensure operations continuity when accounting employees take vacations or leave the company. Or better yet, bring in an outside accounting expert to conduct periodic audits of critical functions.

Separation of duties

Fraud and embezzlement don’t just happen at large companies. Theft may be more common in small businesses because many need more internal controls than in larger organizations. But the good news is that adequate internal controls can be simple and inexpensive. Separation of duties can help your company keep track of cash and help prevent theft by an employee before it happens. Contact our RRBB accountants and advisors if you have questions or need further assistance.