Fraud costs billions of dollars to Canadian small businesses each year. A common source of fraud comes from a person external to the organization such as a customer using a stolen credit card. However, for many small and medium-sized enterprises who are victims of fraud, the perpetrator can also be the trusted employee.

The biggest reason that smaller enterprises are vulnerable to employee fraud is that they do not have the resources to implement strong internal controls in their financial reporting operations. In order to have strong internal controls, the segregation of duties, particularly between the physical safeguarding of the assets and the accounting of the assets, is required. The assignment of these two duties to one person fosters an environment where assets can be misappropriated and concealed by the same person.

For many small businesses, it is not uncommon to have a professional accountant and a more junior assistant (perhaps only working as part-time) make up the entire accounting department. Due to the “family” atmosphere that often exist in many small businesses, staff are trusted even when strong internal controls are not in place.

Often it only takes one personal crisis for a long-standing trusted employee who has never broken the law to perpetrate fraud – including divorce, depression, medical emergency, financial stress and resentment towards the owners – just to name a few.

The costs of fraud can be very high for a small business. For example, it could be months if not an entire year before the owners realize that a large percentage of their deposits have been misdirected to another bank account along with payments recorded as government remittances that have been paid to a mysterious enterprises. Even if the owners detect the fraud eventually, they are then faced with the dilemma of bringing in expensive consultants to quantify the loss when the recovery of the misappropriated amount is low. This is the reason why many small business frauds go unreported – the costs simply outweigh the benefits.

Since a lack of segregation of duties is the most common problem for small businesses, hiring external professional accountants to review financial statements on a regular basis is one cost effective way to strengthen internal controls. The external accountant is not burdened with the day-to-day activities of the accounting department and can provide an objective perspective on the company’s operating activities.

An external accountant tasks can include the following:

• Review the reconciliations of the bank accounts and receivable and payable accounts.
• Access financial information directly from the banks, clients, and vendors through discussions and also through requested statements.
• Compare budgets to actual performance and conduct ratio analyses

The cost of an external accountant is low compared to the cost of being a victim of employee fraud. In fact, the presence of an external accountant performing above tasks will keep the trusted employees trustworthy and will act as another layer of outsourced, objective internal control for the organization.

Mew and Company is an independent firm of Chartered Accountants, located in downtown Vancouver, B.C.  If you have any questions about small business fraud or would like to know more about how we can help you, call us at 604 688 9198 or contact us online. We will get back to you within the next business day.

Disclaimer: All rights reserved for Mew and Company. This blog post is designed for personal use only. Consult your professional tax advisor for more information. Mew and Company is not responsible for any legal disputes resulting from the content of this blog.