Small businesses are often hit harder by fraud and embezzlement than larger companies. According to the American Association of Certified Fraud Examiners, companies with fewer than 100 employees make up nearly 30 percent of reported cases of fraud, and the median loss per business was $150,000. Wouldn't that take a big bite out of your annual profit?? Overall, employee theft is costing businesses in the U.S. $50 billion annually, or about 7 percent of their total revenue, according to the Statistic Brain Research Institute.
In terms of fraud and theft, it's clear that your small business can suffer just as much (if not more) than a large corporation from crimes like embezzlement and misappropriation of company funds. According to Smart Business and Garvey CPA, here are some ways you can prevent fraud and embezzlement in your LLC.
1. Keep a Clear Separation of Duties
Because a lot of small businesses have one person wearing many hats, it is often easier for funds to be misappropriated. Designating duties to different employees within your company can prevent questionable activities from happening and make it more difficult for instances of fraud and embezzlement to occur.
For example, you can have one person handle invoicing while another is tasked with reconciling bank statements. In general, it's smart policy to ensure that the people handling money coming in aren't also in charge of money going out. This reduces opportunities for fraudulent activities like creating and approving forged checks, or creating invoices that pay oneself instead of a vendor.
2. Be the First to Review Bank Statements
Have bank statements sent to your home, P.O. box, or email address, and make sure you carve out time to regularly review them. Red flags to look for include missing checks, checks that are out of order and payments made to unknown third parties (but endorsed by an employee).
Also keep an eye out for any payments made to vendors, professional service providers or suppliers that you don't recognize or remember hiring. Make it known and clear to everyone in your company that you are reviewing bank statements on a regular basis.
3. Examine Cash Receipts and Accounts Receivables
Look carefully into any changes in accounts receivables. For instance, unexplained decreases in cash receipts or increases in uncollectible accounts should raise eyebrows. If you suddenly notice several old or slow-paying accounts that have been written off, make sure to follow up: some employees will use this tactic to garnish payments for themselves when the checks finally arrive later.
4. Maintain Strict Internal Controls
Issuing operational processes and a clear hierarchy will help everyone stay accountable and prevent fraud and embezzlement. Case in point: In 2016, according to CNBC, Matt Ham of Computer Repair Doctor was hit with two instances of theft after two employees were caught stealing cash and parts from inventory. After these occurrences, Ham put in place stronger inventory controls and a strict protocol for counting cash.
5. Use Independent Accountants
Bring in an outside CPA to review your books at least once a year. This will not only make sure your books are accurate and up to date, but will also let your employees know that you are keeping a close watch on your company’s accounts, records and transactions.
6. Hold Anti-Fraud Training
Garvey CPA suggests scheduling anti-fraud training to inform your employees about common signs of fraud and how to report any suspected occurrences. With regular exposure to this information, your employees will know what the correct protocol is if they're ever faced with such an incident.
When it comes to fraud, structuring your business as an LLC can minimize the damage caused by theft and embezzlement. That’s because having a business that’s legally formed in this structure will help keep your personal and business assets separate. In the event that your small business suffers from such a crime, you can at least be assured that your personal assets will be protected.
If you need help forming your LLC, contact Incfile today. They can also help with resources to manage your company if your business is already established.