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When most people hear the word fraud, they immediately think Supergirl BIG fraud, the Enron or Worldcom scandals for example. The truth is that the amount of money lost to the few BIG scandals pales in comparison to the amount of money lost from small businesses across this country every year. The average loss to a large corporation due to Celexa is around $97,000 for each instance, (from the inception or beginning of the fraud to the discovery) for the small business a single instance of fraud (from inception to discovery of fraud) can reach upwards of over $110,000. Multiply that by the many more numbers of small businesses than there are large businesses, and you will see why the figures are so staggering. One estimate put the loss of small businesses at ten times the amounts lost to the large corporations!

Many times though, the small business owner that is being defrauded isnt aware that he or she even makes enough money to be stolen. So fraud isnt an issue that is even close to the forefront in their mind. Fantastico can you be sure that you arent being taken advantage of? You can look for the following signs that a fraud is being committed.

(And please remember that while these signs may be an indication that there is a fraud occurring, that there may be another explanation for these signs being present, in addition, that the way in which you conduct the investigation, or confront the suspected party could add insult to injury by giving the culprit an opportunity to steal from you {again} in the court room with a frivolous lawsuit. So please find your local Certified Fraud Examiner and inquire about their services.)

1. Your Cost of Goods Sold

Despite the volume of business remaining constant or even increasing, it seems that expenses seem to increase unexplainably. These expenses are then ascribed to services or other hard to verify accounts. In today's economy gas is an ever flexing expense. There are periods of sharp increases and smaller decreases. But not counting the expenses such as gas or other volatile materials if it is increasingly costing more for you to sell the same amount of goods, then there could be a serious problem going on.

2. Your Devoted Employee

The good friend you have in your bookkeeper refuses to take a vacation or a day off and insists on doing more than is asked when it comes to duties assigned. Without proper internal controls, a one-person bookkeeping system leads to blatant fraud that is easy to commit and to cover up on a temporary basis. More fraud is discovered accidentally when the culprit is forced to stay home by illness or another reason. If you have one of these employees, you either have an extremely devoted employee, or you have someone with something to hide.

3. Ghost Employees

You have the same number of employees, and yet payroll seems to increase beyond what you remember it being. Sometimes a fraudster will set up what is called ghost employees, and they can be former employees that no longer work there, friends or relatives of the fraudster or entirely fictional people all set up to be paid as if they were actually there working for you. Sometimes these unscrupulous individuals set up ways to continue to get paid even after they have been fired or have quit. (But that's another article.)

4. Kickbacks or Loyal Vendors

You have vendors and or customers who refuse to deal with anyone except the one individual they have been dealing with. I remember working for one store owner who was pleased that some customers would walk out or wait for 'Nick' to arrive and he thought it was so wonderful that these customers would be so "loyal" to someone who works for him. That was until I revealed that it was more likely that 'nick' was giving 'extras' to these customers and getting 'extras' from the vendors.

5. Customers Calling about Late Applied Payments


Customers call complaining that their payments are being applied to their accounts late or not at all. Someone pays their bill on the first of the month, but the payment isn't applied to their account until the fifteenth. This could be that your mailman is really slow, or this could indicate a lapping scheme. This is how it works: Employee converts and uses the payment for Customer A for his own purposes. The payment for Customer B then comes in and he applies that payment to A, then C pays his bill and the employee uses C's payment to cover B's account, etc. Eventually it collapses, but it can continue for a long time until the employee gets greedy and begins taking more payments than applying them. If the same employee industrial injury control over the General Ledger too, the Lapping Scheme can occur indefinitely as he or she can cover the tracks of missing payments by 'losing' the invoices entirely.

6. Vendors Call About Receiving Two Checks for the Same Invoice.

Vendors call wondering why they are receiving two checks for payment instead of one. This could indicate what is called a pay and return scheme. This is how it works: the employee in charge of sending payments makes out two checks to the same vendor for the same amount on subsequent checks. Once the books reflect the missing payment, the employee will call and apologize about the two checks and request that one get sent back, which they will then intercept and convert to their own use.

7. Costs for Materials Increases and You See Some New Vendors

Your costs for materials rise unexplainably. This is a similar result to Number One above but accomplished through a more devious means. There may very well be other explanations for this but if you have what is known as a pass through scheme that is when the employee in charge of ordering parts, or materials takes the initiative to form a corporation (usually called a shell company) from which he will buy from your vendors that materials you are buying now and sell the same materials back to you at a slightly increased per unit cost. After a while, it adds up. A lot of times the employee will have left years earlier, and if no one updates or checks the validity of the vendor list, the 'retired' employee will continue to receive income from his many "shell" companies he or she set up before leaving.

8. New Faces and Loitering Friends

New faces seem to loiter all day around your newly hired employee. This happens occasionally and there is often no worry, but sometimes that employee is giving discounts, free merchandise or pretending to ring up orders and take money for merchandise when he is really allowing friends to rob you blind. Sometimes, it's just a kid excited about having his first job, sometimes it's something else entirely.

Conclusion

Remember that the way you handle this matter will in a large part determine your success in recovering what was lost. It may or may not be possible. It is usually best to contact your local Certified Fraud Examiner. CFE's do a lot of traveling as well but there is probably one locally that you could consult about your individual situation. If you are in the state of Florida, Homesoon Accounting Services can help you. We have a Certified Quickbooks Pro Advisor, David Roberts, expert in using Quickbooks to help find fraud. Call 407-968-5241 for a consultation.

David Roberts, CFE, CQBPA, MBA, lives in Orlando, Florida with four girls, three dogs, two snakes and one wife. He has been a member of the ACFE for four years and has been studying fraud for longer than that. He is the owner of Homesoon Accounting Services which specializes in Quickbooks Consultations and Fraud Prevention and Detection.

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