Small Business Taxes & Management
Special Report
Check Fraud
Small Business Taxes & ManagementTM--Copyright 2016, A/N Group, Inc.
Color copiers, scanners, etc. have not only helped businesses, they've also helped forgers. It's possible to make good copies of checks with readily available equipment. A determined criminal can take your business for a significant amount. You may not be able to completely protect yourself, but you can reduce your exposure. By the way, don't think it can't happen to you. Most such thefts are inside jobs. Often by trusted employees. Here are some steps you can take.
- There's no reason to have checks lying around. Keep them locked up in a desk or file cabinet.
- Unless your volume is high, write checks only once or twice a week. After they're signed mail them immediately. Control the checks right up to putting them in the post or they're picked up.
- Reconcile your checking account immediately on arrival of the bank statement. If you get your checks back, look for checks that have a different look or feel. If you find a discrepancy, notify the bank immediately.
- Get electronic statements? If not, you should. You can review the account periodically during the month, or at least in the middle of the month for suspicious payments as well as doing a quick month-end reconciliation.
- Don't get your checks returned? That's a bit more of a problem. But you can still view the images. You may not have to go through every check. See below.
- Check the bank statement for any suspicious transactions. Checks that are outstanding, but should have been cashed (e.g., a large check sent out early in the month), electronic funds transfers where you seldom engage in such transactions, transfers between accounts, etc. Since more payments are done electronically, make sure you can account for all transfers.
- While you're reconciling the checking account, do the same for any investment accounts, credit lines, etc. Someone could transfer money from an investment account to your checking account in preparation for a defalcation.
- Avoid the temptation to have your bookkeeper or other employee who handles your business accounts also work on your personal accounts. It just increases the chances of problems.
- Use a separate account for payroll. The account should be funded with the company's gross payroll (the employees' salary before deducting withholdings) amount, the employer's portion of FICA, and unemployment insurance payments. Generally, the only checks that should be written on the account are to employees and the government (state and federal). (There are some exceptions, e.g., payments for the payroll service.) After all the checks are disbursed and deposits made, there should only be a small balance in the account.
- Use an outside service to prepare payroll checks and federal and state employment taxes. You'll avoid errors (and headaches), reduce potential embezzlement, and there's a good chance you'll save money. Review the employee list periodically to look for fictitious or former employees.
- Small business owners often have an accompanying ATM or debit card. Guard the card and PIN carefully. Better yet, if it's not absolutely necessary, don't have one.
- Know when your bank statement usually arrives. If it doesn't show up on time, call the bank.
- Keep your checking account balances at a minimum and check on line for any overdrafts. That way you may be tipped off to a problem long before the monthly statement arrives. Fast action can be critical. In some cases you may be able to recover lost amounts from the bank, but strict time limits apply.
- Keeping close tabs on your account will reduce the time between a forged check clearing and you becoming aware of the fact. Reducing that time span can reduce your losses. Access your account regularly on line. Before doing so make sure both you and the bank have safeguards in place that will prevent unauthorized access.
- Look for payments to the same vendor two or more times in the same month. While not unheard of (e.g., multiple utility accounts, vendors who provide discounts for quick pay) it's a bit out of the ordinary.
- Vendor spelling seem off? You do business with Madison, Inc. but the check is made to Madsen, LLC? That's very suspicious.
- Make sure the employee reconciling the bank account is not the same one who writes the checks, etc. Don't have enough employees to segregate duties? Get your spouse or a secretary to do it.
- Consider getting a bond for employees who have access to your accounts. Talk to your insurance agent. The insurance company may have suggestions on how to structure your internal controls.
- Consider having a complex logo imprinted on your checks.
- Require two signatures on any checks in excess of a certain amount, say $2,500. Make sure that's imprinted on the checks.
- Make sure any checks for a significant dollar amount have an original signature, not a machine impression.
- Chances are you know the names of most vendors and, probably, a rough idea of what the check should be for. Take extra time to scrutinize unrecognized vendors or where the amount of the check is much higher than expected. (Someone should be matching the vendor invoice to the check. The invoice should be separately approved for payment.)
- Be suspicious of payments for even dollar amounts. The bill for the truck repair is unlikely to be $1,500; it's probably for some odd dollar amount. That's especially true if sales tax is added to the bill. Exceptions can be installment or partial payments.
- Scrutinize automatic debits. You may be paying your bank loan, company credit cards, etc. through an automatic debit. At a minimum, review the amounts for reasonableness. Better yet, have your bookkeeper match the invoice to the debit and review his or her documentation.
- Keep access to bank accounts to a minimum. That's particularly true for electronic access. Change passwords regularly and make sure they're robust.
- What about that employee who has been with you from the day you started the business? He or she could be loyal, but . . . And relatives are not above suspicion. (Nor is your partner for that matter.) We know one employer who had the utmost trust in his secretary--but he still went to a post office box to collect the receipts, made copies and deposited the checks himself.
- If you're using an accounting program (you should be) you can download an account, your cash disbursements, etc. to a spreadsheet and sort it. You can quickly spot any large or unusual checks or debits. Consider using the same procedures on a vendor list. It wouldn't be the first time vendors have been paid after their products or services were no longer being purchased.
- Even if you can't download to your accounting software, you should be able to down a file that can be read by a spreadsheet program.
- If your financials aren't audited, talk to your CPA about steps you can take to beef up internal controls. Consider having one of his staff do a review of your accounts during a slow time. Tell your staff the auditors will be in. That has dissuaded more than one potential fraudster.
Copyright 2016 by A/N Group, Inc. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is distributed with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional should be sought. The information is not necessarily a complete summary of all materials on the subject. Copyright is not claimed on material from U.S. Government sources.--ISSN 1089-1536
--Last Update 06/09/16