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Small
business clients at risk
Small businesses are the most vulnerable to occupational
fraud and abuse and suffer disproportionately
larger losses as a result, according to the 2004
"Report to the Nation on Occupational Fraud
and Abuse" prepared by the Association of
Certified Fraud Examiners. Compounding the problem,
small businesses are less likely to have the ability
to survive such losses.
CPAs are often the first resource small businesses
contact when they suspect fraud has occurred.
This is particularly true for small nonpublic
clients that may not have the internal audit or
human resource departments that are familiar with
the processes and procedures to be followed in
such circumstances. |
How should CPAs advise such
clients? First and foremost, they should caution
against reaching any conclusions until the alleged
incident is investigated thoroughly Then they
should follow this step-by-step process. The CPA
can perform steps one and two concurrently
Step one: Determine the initial
facts and circumstances
* How did the client become aware of the suspected
fraud?
* How might this fraud have occurred?
* Are
the allegations credible?
* Can you identify the possible indicators of
fraud?
* Are others aware of the suspected fraud?
* Could others be involved?
* Are there changes in the suspected employee's
lifestyle?
* Were background checks performed?
* What are the estimated losses?
* Who are potential witnesses?
* Can another employee substitute for the suspect
temporarily?
Step two: Seek the advice of
legal counsel to avoid potential litigation
* Is the suspect an employee at will, or is
there a valid employee agreement?
* Are policies and procedures in place to deal
with termination?
* Can the employee be placed on administrative
leave?
* Are there policies and procedures regarding
the expectation of privacy?
* Is fidelity bond coverage applicable in this
situation?
* What procedures should be followed in investigating
the allegations?
Step three: Investigate the allegations
* Under counsel's direction, perform office
searches, review e-mail correspondence and interview
the suspect with at least two people present.
* Interview employees and others who may have
knowledge of the suspected fraud.
* Hire a private investigator and forensic accounting
expert, if necessary
* Make copies of, but do not work from or alter,
original documents. These may be considered
evidence and required in subsequent prosecution/litigation.
* Quantify losses.
* Consider contacting law enforcement.
Step four: Take precautions
* You may have to consider placing the employee
on administrative leave or terminating his or
her employment.
* Deny the suspect access to the physical premises
and associated properties.
* Secure company credit cards and safety deposit
boxes.
* Disable the suspect's computer and network
access.
* Change signatories on bank accounts for which
the suspect employee has signature authority
Step five: Mitigate the damages
* Seek restitution.
* File a fidelity bond claim.
Step six: Advise the client on
instituting internal controls
* Develop written accounting policies and procedures.
* Segregate functions and duties.
* Limit access to documents, computers and assets
to only those who need it.
* Review and approve all journal entries and
disbursements.
* Require dual signatures on all checks.
* Prenumber invoices and checks for ease of
tracking.
* Conduct surprise internal control reviews
at intervals.
* Ensure that key financial personnel take a
vacation annually Verify or audit their work
during their absence.
* Secure fidelity bond coverage.
* Employ a third-party hotline service to receive
tips of suspected fraud.
* Institute appropriate preemployment screening
processes.
Considering the devastating potential for loss
from fraud by small business owners, CPAs need
to be well-informed regarding incidents of suspected
fraud. Equally important, they should advise
small business owners about the need to make
fraud prevention a top priority
--Gregory F. Lawson, CPA/ABV, senior partner,
Goodman & Company LLP, Newport News, Va.,
and Patrice Schiano, CPA, consultant, Protiviti,
New York
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