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.
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?
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?
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.
Consider contacting law enforcement.
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.
Mitigate the damages
File a fidelity bond claim.
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