Protect Small Business: Small Companies without Adequate Internal Controls Need CPAs to Help Them Minimize Fraud Risk

Denise, a bookkeeper for a small trucking firm in Birmingham, Alabama, wishes she had never heard of Ralph Summerford, CPA. Because of his thoroughness, Denise is facing several years in prison for embezzling $550,000 from her employer. At least she will look good standing before the sentencing judge: Denise spent a great deal of her illegal loot on head-to-toe cosmetic surgery. She blew the rest on a shiny new Lexus, luxury vacations, clothing and jewelry. And, of course, Denise had to have a big house to store all of her finery. Surprisingly, it wasn't the high living that made her employer suspicious. "The owner was going over the trucking company's budget when he noticed Denise's salary was listed at $38,000 a year," said Summerford. "But the business owner distinctly remembered that he had set her pay at $35,000." The owner pulled Denise's personnel file and discovered that someone had altered her pay record. It was obvious to him that no one but Denise would have been motivated to falsely increase her salary. Investigating further, he noticed suspicious-looking wire transfers from the company's bank account. That's when he called in Summerford. "Like a lot of small businesses, the trucking company had very limited accounting controls," said the veteran CPA, now a partner with Dixon Odom PLLC in Birmingham, Alabama. "In this case, the sole division of responsibilities concerned authorizing all the checks. While only the owner could sign checks, Denise did everything else: post the books, reconcile the checking account and authorize wire transfers." Her scheme was simple. After wiring money directly from the company bank account to her own, Denise would post the books, charging the funds transfer to one or more expense accounts. Then, when she reconciled the bank account, she simply would tear up the evidence. Summerford investigated the fraud case, interviewed Denise's coworkers and assembled the documentary evidence including bank statements, wire transfer requests and deposit slips. He then prepared charts and exhibits summarizing the scheme, which he included in a written report to prosecutors. Summerford's work was used to indict Denise for her thefts. "Denise was well aware the owner did not review the bank statements," said Summerford, also a certified fraud examiner. "And since the business was not audited, there was no independent review of Denise's work; yet almost any degree of scrutiny of the bank statement could have prevented this scheme." Summerford said most schemes like Denise's start out relatively small. "But when thieves avoid detection, it motivates them to steal even more," he said. "Many will continue to steal from a small business until it literally runs out of money and goes broke." Although the trucking company didn't go bankrupt, Denise's thefts were extremely costly. Small organizations face a serious fraud problem: Dishonest employees will steal them blind. BIG CONCERN FOR SMALL BUSINESS Small businesses have every reason to worry about fraud. According to the Association of Certified Fraud Examiners' (ACFE) "2002 Report to the Nation on Occupational Fraud and Abuse," the per-employee losses from fraud in the smallest businesses are 100 times the amount of their largest counterparts. (The complete report can be downloaded at www.cfenet.com.) Thus, this is an area in which CPAs can be valuable consultants to their clients. Most small businesses don't have a need for a CPA to do a full audit; however, CPAs can provide a number of fraud prevention services.  Employee education. CPAs can conduct on-site training for clients in the form of live presentations and/or computer-based education.  Internal control reviews. Reasonable internal controls are critical in a small business. A CPA can review the existing system and make recommendations for improvements.  Cash reviews and reconciliations. …

Field of study: Business