The small business owner faces many challenges in managing and growing a business. The risk of financial fraud being committed by an employee is a significant issue that a business owner often overlooks.

The limited resources of small businesses and organizations affect the ability to segregate incompatible functions related to the physical safeguarding of assets. The lack of segregation of duties leaves internal controls weak and susceptible to circumvention. The risk of improper segregation of duties is compounded by the fact that many procedures tend to be disregarded or ignored such as monthly reconciliations and analytical review.

Lack of oversight by owners or management creates opportunity for transactions to be processed through a company or organization’s accounting system without being properly authorized. In many cases, small business owners or management are too busy to review the finances of the business or organization and trust in the employees, often with disastrous results.

Every small business owner and small organization is then faced with a difficult decision; the cost of implementing controls versus the risk of undetected fraud. The cost/benefit analysis is such that it does not make economic sense to implement controls which cost an organization $2 if the economic risk is only $1.

When making this assessment, the owner must be aware of all the costs associated with fraud, which include lost assets, but can also include legal and accounting costs associated with quantifying, time and effort making recovery and the cost of financing cash shortfalls.

The current state of the Canadian economy has put many individuals under a great deal of financial pressure. The small business owner and small organization must ask themselves “how well do we know our employees and their personal and financial situations?” In many cases three factors must be present for an employee to commit fraud:

  • Opportunity
  • Pressure
  • Rationalization

Employers should be aware of the following warning signs when assessing their risk with Employees:

  • Refusing to take vacation
  • Living beyond their means
  • Personal financial problems
  • Personal vices such as gambling, drugs, extensive debt, etc.

Taking the time to review your organization’s internal controls and employees and implementing improvements where material risks are present can help prevent fraud and potential material loss of your business’ assets.

For further advice or assistance with these or any other financial issues, please contact a Millards representative at (519) 759-3511.