Guarding against fraud

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Thought your rate-cutting competitors, skyrocketing insurance and fuel were your chief worries? How about the potential enemy within? Employee fraud happens and can take down a company.

Many trucking companies – small and large – run on razor-thin administrative personnel budgets. This means that key positions – say bookkeeping or sales – can be the responsibility of one person other than the owner. Sometimes, the owner or manager of a fleet or unit simply must fully trust someone with key areas.

When an employee has too much latitude and opportunity for shenanigans, sometimes temptation is too much to resist. Most frauds start small. When no one catches it, the fraud balloons over time.

So how can you protect yourself? Start with a personal education about the types of fraud that are most likely. Then, get with your CPA and consider a review of your internal control system.

Three factors are the root of many frauds: Inadequate employee pre-screening to check backgrounds, insufficient personnel to have adequate internal controls and too much trust placed in one person.

The bookkeeper position is the first area of vulnerability. When business owners delegate too much responsibility – either from lack of understanding or from pure trust – they leave themselves open for trouble.

Having an accounting firm help with annual reports and taxes is an improvement to the situation, but not a guarantee against trouble. Typical CPA services of compilations, reviews, and even audits are not specifically designed to uncover fraud. However, you may want to talk with your CPA about specific fraud-detection services.

Simply reviewing your bank account – before the bookkeeper gets it – could vastly improve your internal controls. Fraud examiners say that nine out of 10 frauds occur through the bank account. It’s easy to understand why this is the case when you look at the two big vulnerabilities: When money is coming into the business and when money is leaving.

Cash is obviously the most easily intercepted asset, but rarely in trucking is cash collected for shipments. Instead, payment usually comes in checks. The most basic steps to prevent abuse are to use restricted endorsement (for deposit only) and to segregate the duties among mail-opener, deposit-maker and A/R poster. If one person performs all those tasks, he may have the opportunity to divert cash and cover the diversion by posting the missing payment to the A/R record.

Money going out in the form of payroll checks or vendor payments – if not monitored by the owner – could easily be altered or increased, or fictitious vendors or employees could be created. This makes the bank statement review by someone independent of the bookkeeper most important. At least the reviewer can scan each check for familiarity of the vendor and reasonableness of the amount.

Sales reps with too-cozy relationships with shippers could be a real problem. Giving great rates in exchange for under-the-table kickbacks is not unheard of. Good internal control systems require involvement and approval of higher-ups for rates and contracts, so that no one person has the opportunity for this type of fraud.

Fraud examiners will also tell you that there are certain red flags that could point to trouble. Expensive cars, vacations, homes or clothes sported by a $30,000-per-year employee should raise certain questions. Another red flag appears when people in areas of trust refuse vacations or assistance.

Don’t be blind to risks inside your own business. Talk with your CPA about specific services and internal control systems that could prevent a major headache or worse, risk your entire business.

For more on understanding fraud risk for small businesses, including a trucking company example, see “Protect Small Business,” by Joseph T. Wells, March 2003 Journal of Accountancy, at this site.