One of the sad facts of business ownership is the necessity for fraud prevention. It’s more widespread than you think. In the Association of Certified Fraud Examiners’ “2012 Report to the Nations,” nearly one out of every three small businesses were victimized by fraud with a median cost of $147,000. Yikes!
Stated differently, one out of every three business owners reading this article will be victimized by fraud. Here’s 25 steps you can take to lessen the chance it will be you.
1. Control the Mail
Make sure IRS and bank mailings, at the very least, are sent to a P.O. Box that you visit or are sent to you home address. Open important mail yourself.
More than one contractor has discovered too late that a bookkeeper kept payroll taxes instead of sending them in with Form 941. The IRS doesn’t hold the bookkeeper accountable. You are held accountable.
2. Stamp Checks Upon Receipt
When a technician turns in a check or you open one in the mail, immediately stamp the back, “For Deposit Only.”
3. Personally Make Bank Deposits
If you use a P.O. Box for mail, add a trip to the bank. Make all of the bank deposits yourself.
For your approved vendors, make sure they know that nothing should be sold without a purchase order and that certainly, no invoice will be paid with the P.O.
4. Double Check Invoices for Authenticity
Periodically, I receive at least one fake invoice ever six months. Shysters fabricate these and mail them out, hoping a busy office will just pay them. They’re usually small amounts so they do not draw attention.
5. Follow Up on Diagnostic Only Calls
While I am sure your technicians would never contemplate a scheme like this, there are techs who tell a homeowner they can return after hours or on a Saturday to make a repair or replace equipment for a sharp discount. The call is reported back to the company as a no-money call.
Just in case your technicians are ever tempted, make sure someone from the office follows up with happy calls to the customer to verify that no work was performed. You can also check truck GPS records to see if the technician returns to the home sometime over the next week in your vehicle.
6. Use an Approved Vendor List
An old trick of shysters is to fabricate a company or to send money to the brother-in-law’s company. You can eliminate this by preparing a list of approved vendors. If an invoice is received from a company that’s not on the list, it doesn’t get paid until you verify its legitimacy.
Every so often, match the inventory used against the tasks performed over a period of time. This can be automated by limiting reorders to items associated with the tasks performed.
7. Create a Purchase Order System
Another scheme is to charge parts and material at an approved supply house and then to use them for side jobs. For your approved vendors, make sure they know that nothing should be sold without a purchase order and that certainly, no invoice will be paid with the P.O.
8. Use an Authorized Purchaser List
This complements the approved vendor list and P.O. system. Limit who has the authority to issue purchase orders and make purchases.
9. Watch Truck Inventory
Every so often, match the inventory used against the tasks performed over a period of time. This can be automated by limiting reorders to items associated with the tasks performed.
10. Minimize Inventory
The best way to prevent inventory theft is to get rid of the inventory. Do not look at it as parts and equipment. Look at it as stacks of money. Let the supply house keep the inventory until you need it. Minimize what you carry and minimize the carrying costs and potential for fraud.
11. Periodically Compare Mileage to Fuel
Every so often check the fuel used/charged by a tech against the miles driven from the GPS. You want to make sure the tech isn’t filling up personal vehicles.
12. Scrutinize All Invoices Paid in Cash
When customers pay in cash, double check the invoice to see if it could have been modified. If you are in doubt, call the customer to verify the amount paid. Invoice modification is made more difficult when you utilize a flat rate system, especially a simple system with only a few price levels.
If you take a hard line and prosecute an employee who is caught stealing from the company, you send a message to everyone else.
13. Review Reports
If you require commission reports or lead reports double check them to ensure, for example, a company lead doesn’t become a self-generated lead with a higher commission. Similarly, review all expense reports. While this seems like a hassle, it only takes a few minutes.
Periodically asking a few questions about an item on a report serves to let everyone know you are watching and do check the reports. This is preventative on its own.
14. Investigate All Missing Numbers
Purchase orders, invoices, and checks should be sequentially numbered. If a number is missing, find out why.
15. Background Check
In some states, background checks are mandatory for employees who will be sent to residences. Even if they aren’t, background checks should be standard.
Any employee who handles money in any form (cash, checks, or credit cards) should also receive a credit check. Do not tempt someone with bad credit.
Even if your insurance doesn’t require it, you should also drug test. It may dramatically limit your pool of applicants, but it will also limit your liability.
If you are accessing your bank accounts online, consider dedicating one computer to the task. Change the password for this computer frequently.
16. Create a Separation of Duties
At some point, companies grow beyond the owner’s ability to handle all of the check writing. Make sure that whoever prepares the checks lacks the authority to sign the checks.
17. Subscribe to a Fraud Hotline
The presence of a fraud hotline for employees to use to anonymously report fraudulent activity can not only help you identify and catch fraud, it can prevent it. Just knowing that the hotline exists is preventative. Display plenty of posters and stickers around the office and shop with the number on it.
18. Require Vacations
If someone doesn’t want a vacation, it should be a red flag. Maybe the employee hates the family, but more likely he or she doesn’t want anyone to take over for a week and see what the employee’s been up to.
19. Be Alert to Behavioral Changes
It should be a red flag when an employee suddenly starts working later hours. You should also be wary when an employee’s lifestyle changes or appears to exceed his available income. Even a change in mood or behavior is a concern. There may be a perfectly reasonable explanation, but it’s also worth a little added scrutiny on your part.
20. Use Personal Credit Cards
Require personal credit cards rather than issuing company cards. This reduces your liability, while building up the employee’s credit. Offer to pay the annual fee if the card is used primarily for business. All charges must be turned in on an expense report before they are paid.
If the employee needs a credit card, but lacks the credit history to get one (hard to imagine in today’s easy credit world), you can always create a separate bank account and issue a debit card. This limits your exposure to the money in the account.
21. Dedicate a Computer for Online Banking
If you are accessing your bank accounts online, consider dedicating one computer to the task. Change the password for this computer frequently.
22. Balance the Checking Account
The checking account should be balanced monthly by you, a bookkeeper (and presented to you), or your CPA.
23. Use Positive Pay
After a thief the other side of the country printed fake company checks and forged signatures, we began using Bank of America’s Positive Pay system. We verify each check with the bank before it delivered. If it is not verified, the bank will not cash it. While irritating, this has eliminated the fake check fraud.
24. Buy E&O Insurance
In case you still find yourself a victim of fraud, purchase errors and omissions insurance that also covers outside theft, employee fraud, and computer fraud. At least then you will be whole (or close to it).
25. Prosecute or Pay Restitution
If you take a hard line and prosecute an employee who is caught stealing from the company, you send a message to everyone else. It might be a hassle today, but it will prevent more hassles in the future. In fact, the story of what happened to ole so and so, should become part of your company lore and repeated every so often so that new employees get the message.
Sometimes contractors choose not to prosecute employees who commit fraud. Frankly, sometimes the perpetrator is a family member. At the very least, terminate the person and get agreement that restitution will be paid.
Fraud is all too real among contractors. In the Service Roundtable, we’ve heard many heartbreaking stories about contractors whose most trusted employees stole from them. The betrayal is hard. Recovering the damage is often impossible. Companies have nearly gone bankrupt. Adopting the practices described here will not prevent all employee fraud, but it will reduce the opportunity for fraud, chances of escaping detection, and odds for fraud in the first place.
For more contractor business advice, visit www.ServiceRoundtable.com. At the Service Roundtable, you can discover everything you need to know to run a highly profitable contracting business.