How To Protect Your Business From Fraudulent Activity

 

 

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Business owners/CEO’s in general will follow a standard method as they pursue growth:  strive to continually generate more customers, provide products/services they need – and desire - at a price point leading to a profitable business, enjoy your work and have time to lead a balanced lifestyle.

Few CEO’s/owners I know of can say that they can mark as affirmative in their life check-list all of the above characteristics, although the majority of them sincerely believe that the nature of entrepreneurship itself will facilitate these personal benefits.

For entrepreneurs out there wishing they had a balanced lifestyle, profitable businesses and an enjoyable life, deliberate planning and continuous monitoring of processes and procedures are ultimately required to realize the “golden age” of a self-running, profitable business where employees take initiative to assist you in running an optimal, profitable and sustainable operation.

At a certain point in the evolution of a business, additional efforts and resources are necessary to document and monitor a system of operation that will support the current and forecasted profitability of the practice.  If I start up a business, am fortunate enough to generate a substantial amount of clientele, I’m going to need additional staff and resources to meet the needs of that additional clientele (what exactly those additional resources are is the subject of another article).

However, as many reading this may know, piling up extra hands on deck and filling up the supply closet is an inadequate strategy in and of itself to deal effectively with a growing customer base.  Nor do these tasks satisfactorily position the business to take on future growth and customer service levels.  In other words, the constructing of an operational foundation upon which to build a healthy profitable and sustainable business is given low priority.  In reality, the business “does what it can to meet demand”.

Such a story, eloquently referred to in some circles as “crash and burn” is unfortunately an all too common reality for a disturbingly large amount of entrepreneurs eager to serve the need to their respective communities.  Others recognizing the pattern may describe this scenario as putting the cart before the horse, or “building a house on sand”.  However you want to call it, if insufficient time is given to documenting procedures or outlining optimal methods for fulfilling tasks and procedures, you the CEO/owner are tacitly releasing your employees to fulfill their duties in whichever way and by whichever method they choose, and this can be catastrophic if/when the business is experiencing a growth trajectory.

Giving staff a certain amount of autonomy is fine in a start-up, or in one where limited services are provided with therefore limited variance in the type of tasks being performed each day.   A different approach and mentality among business leadership, however, is necessary when the business is realizing substantial growth.

This article deals with establishing an operational process at the business, or “a map of operations” that can be followed by new hires and veterans alike, to ensure that the quality of service provided remains consistent, facilitates profitability and sustainability, and which protects from either internal or external fraudulent activity.

Experience tells us that people appreciate quality and consistency, and if these 2 traits are constant in the business, trust accrues with customers to such an extent that the customer will not only find it difficult to switch to a competitor when something does go wrong, but will also be increasingly inclined to provide referrals of your product/service to those people they trust.

Sustainability is an important factor in the evolution of a business.  If the business is operated ineffectively or revenue growth is not accompanied by concomitant increases in human and tangible resources, staff, associates, and CEO’s/owner’s alike experience burn-out and will find it difficult to maintain a pleasing operating and working environment.  Customers will eventually dial in to this and will act accordingly (ie: leave for another, more welcoming competitor).

Once customers recognize a familiar and consistent pattern when they come into the office, they will be inclined to extend trust, cementing a long-term relationship.  In business, consistency means comfort for the concerned customer.

 

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POLICIES AND PROCEDURES

When the business expands, there is a tangible need to organize customer and operational flow so that required tasks can be completed correctly.  A Policies and Procedures manual becomes necessary so that existing staff can reference appropriate methods, new staff have a resource to go to learn office practices, and the office contains an organization manual that can provide consistency on a continuous basis. Our experience reveals that a Policies and procedures manual should cover at least the following:

 

1. POLICIES

Staff overtime

Staff will invariably have to work some amount of overtime to complete required tasks.  Amounts paid in excess of the regular workday, and methods of payment for overtime worked should be documented.

 

Staff hygiene

Although this seems redundant, good personal hygiene is necessary to portray a professional environment.  If any staff member does not adhere to a certain documented level of personal hygiene, the adverse results on customer retention and relationships can be substantial.

In order to warrant disciplinary action if such a situation arises in your business, a documented personal hygiene policy describing  - at the very least - attire and cleanliness standards will be necessary.

 

Office closing and opening Policy

This should include days that the office is closed for statutory holidays, as well as vacation days.  Information regarding when the office will be closed should be posted in advance of the office closure.

 

Bonus Policy

Various businesses will incorporate a bonus plan based on production, length of service, or other criteria to motivate staff.  Such a policy usually is discussed at the time of hiring, but should be available in the office handbook for reference at any time by staff.

There will be other policies relevant to your particular business, but the above office polices are standard inclusions in any office policy manual.

 

 

1. PROCEDURES

Procedures detailing acceptable methods and priority levels of tasks enable staff to learn correctly and perform their tasks cohesively so that business growth is not hindered by wasted time or inefficient operation.  The intent behind establishing and documenting procedures as well as allocating responsibilities is to maximize the efficiency of the office operation.  In the interest of maintaining a positive work environment (ie: staying short of training your staff to be robots), an assumption behind training staff correctly is that by performing their tasks correctly and in a timely manner, the level of achievement  and (hopefully) satisfaction) they engender as a result will contribute to a positive working environment.

If staff perform tasks well and are able to connect with customers to foster a level of trust which may lead to additional sales or referrals, then they should be able relax and talk comfortable among fellow staff members.  If the working day for staff feels like non-stop work form the time they begin to the time they break for lunch or for coffee, then it becomes more difficult to foster a positive and healthy working environment.

Ultimately, however – and for purposes of this article – the practical result of the documentation of procedures is to facilitate the internal audit of the operation and to reduce the chance of fraud.

The financial procedures carried out in most offices each month are encapsulated in 4 main areas:

 

1. Bank reconciliations
2. Receiving payments
3. Invoicing customers
4. Paying vendors

 

Although there will be other financial procedures performed regularly by office staff, we’ll only cover the ones listed above in this article.

When documenting procedures for these tasks, we want to be sure that the procedures ensure the following:

 

1. Completeness
2. Existence

 

In all of the above procedures, provision should be made within the task list to ensure that all items have been recorded, and that all applicable components involved in the transaction exist.  These items, called assertions the auditing world, together reduce the chance of fraudulent activity and / or collusion between staff and patients.

To implement an effective internal audit environment at the office and minimize the chance of fraud, all procedures should be documented and followed for each of the above tasks.

 

Chronological task list  – Bank Reconciliations.

• Bookkeeper (or can be any staff person) retrieves the monthly bank statement (the workings statement), either the paper copy or from online.
• Bookkeeper ensures that the closing bank balance on the previous months bank reconciliation is equal to the opening balance on the working statement).
• The bookkeeper starts with the first transaction on the bank statement and records the transaction in the accounting software
• Bookkeeper records all transactions on the bank statement.
• Once all the transaction are recorded, the bookkeeper compares the ending bank balance to the bank balance in the accounting software.
• If the 2 numbers are the same, then the bookkeeper completes the reconciliation be checking off all the transactions in the software bank register. that have cleared the bank account.
• A printout of the bank reconciliation from the accounting software should show the reason(s) for the difference between the ending bank balance and the ending balance on the bank account in the accounting software.

If there is a discrepancy between the ending balance on the bank reconciliation and that on the actual bank statement, this usually means that there is an item recorded on the accounting software bank register that does not appear on the bank statement, and should therefore be deleted.

 

 

Fraud exposure areas

 

1. If the bookkeeper has access to cash or cheques as well as ability to alter the accounting software, he or she can take cash or cheques, reduce revenue and accounts receivable listings in the accounting software and just deposit the remainder in the bank account. There would be no indication that any money was stolen.

 

SOLUTION:

Separate access to accounting software and access to cash or cheques.

 

Chronological task list – receiving payments:

1. Receptionist (or other admin staff member) retrieves cash or cheques received in the mail and signs off on receiving the items.

 

2. Receptionist fills out report showing the amount of cash and cheques received in the mail (deposit report) and passes the report along with the cash and cheques to another staff member (staff #2).

 

 

3. Staff #2 reconciles outstanding receivables in the office software to cash and cheques received. Staff #2 then signs off and prints out receivables report and gives receivables report to bookkeeper.

 

4. Staff #2 prepares bank deposit and gives to CEO/owner (or whoever will be doing the bank deposit). CEO/owner checks the deposit against the deposit report to make sure that both are equal.

 

 

5. Bookkeeper updates receivables amount in accounting software.

 

Fraud exposure areas

1. Receptionist colludes with customers to reduce the amount of a customer’s bill, in return for a fee or a percentage of the amount by which the bill as reduced.
2. Receptionist colludes with staff #2 to reduce the receivables amount and pocket some of the cash and cheques

 

 

 

Nicholas Kilpatrick is a partner at the accounting firm of Burgess Kilpatrick in Vancouver, B.C.  He specializes in business development, and has worked with business owners to increase profitability at all stages of their businesses.  He can be reached at nkilpatrick@burgesskilpatrick.com or at 604-327-9234.