Small Business Fraud Risks | Hire A CFO Edmonton

Hi, thanks so much for tuning in for another episode of asks Burl CPA. Today we are talking about small business fraud risks. I Have Laura here with me today. Again, so, uh, uh, Laura, I’m sure you’ve gone through some, uh, some fraud risk and you’re, you’re auditing courses at grant Macewan. So an hour going to, we’re going to dive through them in the, in the real world and see what we can get. The average small business owner, some tips on that. So the quote that I have for you today, it’s a Michael Gerber author of our favorite e-myth here. And it says, the fatal assumption is if you understand the technical work of a business that you understand the business that does that technical work. So those are two separate things. The technical work in the business and running the business that does those technical work. And there’s always the, the statistics, 50% of all cases, small businesses fail.

And you know, often they are the top three reasons. You know, the one of the big three reasons they run a cash. Um, so, you know, really, you know, if we can, sometimes you’re gonna run into cash because of bad business decisions, you know, or trouble in the market or competitive market. But we do not want to run out of cash because of a fraud issue. Um, you know, the story is we have, you know, business owners, they have one person in charge of the accounting. They have a filing system that no one else is familiar with her. They have records that they’re not quite up to date and all of a sudden they realize money is going missing. And now the witch hunt begins. Um, so Laura, what are the questions that business owners should be asking? And we’ll probably even before this starts happening, why is having only one person assigned to a financial task?

This is auditing one o one. And who we’re looking at, you know, before you do an audit on an entity, you’re looking at what are the risks on that entity? And kind of one of those basic risks are if there’s only one person in charge of this thing, you know, even if it’s a nefarious reasons, you know, that it’s easier for them to get away with it. You know, the only person that ever take a vacation, no one else ever does that job. You know, you’d have no idea on what that variation, what normal actually looks like. A, because we have, you know, one person doing it all the time and even if there, there is nothing nefarious about it, if they’re there, you know, they, they could be making a mistake. It could be someone outside the organization and that person doesn’t catch it.

You know, having only one person involved is not normally advisal. Most business owners, they think that they don’t have another choice. Don’t stay paranoid about fraud and Hire A CFO Edmonton to take care of your accounting. Uh, but outsourcing is a very powerful choice that often you can outsource to an organization like ours. Of course, even that, um, you know, that they can have multiple people involved in it for cheaper than the cost of one staff member. But if you do it in house, you know you have that big giant risk of that one person, you know running the accounting, check the signatures, checks. Okay so heres a myth of being an entrepreneur and you go into the bank and you start your business account and they have you sign that signature card and feel really good and you think there’s probably some sort of handwriting analysis in the back who works for the bank. And I have news for you, I’m going to break someone’s heart here is the bank does not check those signatures and they’ll tell you they check them.

But I’ve tried to ask the bank, you checked one in a hundred, you check one, two check one in 10,001 in a million. Maybe they checked them but their checks so sporadically it’s, they might as well not check them at all. And if you don’t believe me, if you have two bank accounts of business and a personal account and take your business account rates yourself a check for a dollar and sign up with a happy face, a happy face, not even a signature. So I end with a happy face, put it into your personal account and see if a cashless, it’s going to cash. The banks do not check those signatures. Um, you need to look at checks like cash. They should be under a locking key and under the single biggest risk of, you know, fraud and most small businesses are those checks. They should be under lock and key.

If you have $100,000 in your corporate account, you should look at one check. Like you would look at a stack of hundred dollar bills totaling $100,000. How does using an electronic fund processor on a set schedule and reduce fraud? Okay, so instead of using the checks, let’s say we got an EFT processor, so no one can just go take a check and sign up with a happy face and cash it or you know, checks they can cash twice these days of people. The TV had a big problem with the a checks getting cash twice. I think they’ve corrected it may be so they say, um, but um, you know, if you have an EFT funds provider, you can transfer that money out of your corporate account. Toony if t fund provider, let’s say for all your payroll and payables and you know, uh, you know, good outsource accountants, they can set this up. That is why you should Hire A CFO Edmonton to take care of it for you.

So all of your payroll and payables, they get totaled and you approve that total, you know, individualize itemized total. And that amount gets transferred from your bank account to another trust account. Who Does the EFT is for you. And then when you look at Your Business Bank account, instead of having withdrawal every single day, and you have hundreds of them, maybe in this, in one month, you could have, you know, a couple of hundred a cash disbursements that withdrawals every time you’re ready to check to every person on staff and every disbursement to a payable. And now all of a sudden you have this EFT provider, you have one cash disbursement every two weeks. Well, guess what? You no longer have to be a uh, um, you, you no longer have to be a forensic accountant to know that there was a problem. If there was a charge that comes out of your bank account that you didn’t approve, it just sticks out like a sore thumb instead of how to have the, if you have three and it’s just a, you know, it’s an easy process to do. You know, it’s a keep it simple stupid and uh, you know, it doesn’t have to be difficult. You can put those controls in place. So the money is dispersed at a set time. We reduced the number of transactions that are actually hearing on a statement that way any fraudulent transactions, they’re actually just super easy to identify.

Is Petty cash a fraud risk and how can you use a debit card to avoid, this is 2019 people, you no longer need petty cash. So this is the news flash and business organizations. They think I need petty cash or you have to pay for everybody. And their dog accepts credit card and debit card. And often credit cards can be a little bit cumbersome. You don’t want every person in your team to have a credit card that can be hard. But here’s the mood where you have someone, and it might be person a one day, it has to go by the, the coffee of the officer’s supplies and the next day it’s person B. Get a debit card, debit card from your bank. These debit cards, you know, a debit card that can’t be used to issue any online transactions. If anyone sees was on the front or back of the card. And you know, nothing’s going to happen unless they have the card with them. Settle a limit on it, say 500 bucks. And this is now your new petty cash tool. Not only is that easier to account for, but it’s dramatically less risk than having cash and you know, uh, you know, paying for expenses in cash, which not only are a fraud risk, but they’re also an audit risk too because you know, uh, you know, it’s just always, you know, this year auditor’s did this really happen. Um, so that’s always a problem as well.

How do people use dummy corporations to do fraud? A company. Okay. So just because you’re paying a corporation doesn’t mean that corporation is legitimate. Um, you know, if we have a, a check going out every month to x, Y, Z corporation, there’s nothing to say that that’s someone inside the corporation or maybe someone else side the corporation who’s just set up a dummy corporation and they just bill you forever. When you Hire A CFO Edmonton it sets you up for success. So I’m jealous because it goes to a corporation and you have to know who these payments are going to. And if you don’t recognize, you know, a name on these cash disbursements that’s going out from hopefully your EFT provider, not your checks, it’s going up to your three or EFT ies or you don’t recognize the charge on your credit card statement. You don’t recognize that name. That can be a problem. You know, dummy corporations are often used to submit a bill and get a payment for a service that really never existed.

How easy is it for people who control payroll to inflate earnings? Unfortunately, it is very easy. Um, and the main defense around that is not having one person on the payroll processing payroll, which is very difficult for most small businesses to do a internally, which is why it’ll big benefit of outsourcing is very easy for someone to put an extra dollar an hour, uh, on a paycheck or an extra hour or two every, uh, every payroll or you know, every so often and inflate the earnings and very difficult for the business. You know, when you’ve got a staff of 10 or 20 or 30 people to pick up those extra two hours, that can be very difficult. So that versus the processing, the payroll has a high degree of responsibility. So auditing it when you can sporadically, um, you know, a periodic basis and then putting more than one person in charge of that. And that’s, that’s the way to go about that.

Oh,

how can people use payroll remittances to defraud a company? Okay. So, and this one can be a little bit, this one can be even harder to catch. So number one, they’re plating hours or they’re inflating their wage rate per hour to an employee or some sort of reimbursement or something like that. Or number two, it’s payroll remittances. So you look at what we’re paying each employee, and then you have this lump sum payment that’s going out to cra. These are the payroll deductions up. We’ve got to send a Pr Cra and let’s say employee a had $500 worth of deductions, but instead of sending the government and the employee B had another $500 worth of deductions and employee a is the one processing the payroll, instead of them sending $1,000 to cra, they send them 1500 and then when it comes time to process their t four, they put that extra tax paid on their t four.

And although they didn’t get the money directly, in a roundabout way, they’re going to get it on their personal tax return. And that it can be very difficult for the average business owner to see happening. Uh, because you know, you’re seeing that actual payroll amount. It really comes down to the fact that wehn you Hire A CFO Edmonton it will in fact help your business. So again, it, it comes down to, uh, you know, having more than one person in that, um, or you can be checking those individual pay stubs if you’re adding them up those deductions. So total deductions that are actually, um, you issued to cra because it’s, it’s going to be really difficult for the average business owner. Just see that at at year end.

Okay.

Should you share your credit card credentials? No. Uh, do not share credit card credentials. If somebody legitimately needs a credit card in your business, get them a credit card, get them in an individual credit card. And when you give them that credit cards, you own this credit card. You are responsible for the credentials on this credit card. And if they go missing, it’s on you. You were going to be held accountable for this. But if you have a credit card and two or three or four people in the office know the credentials and all of a sudden there’s a fraudulent charge. Now you don’t know. Was it someone in the office? Was it someone outside of the office? Um, so, uh, you know, who’s being careless for with the information, who’s being careful with the information you don’t know. Give us a call if you’re looking for to Hire A CFO Edmonton. So if they need a credit card, get them a credit card and make them take ownership of that information and charge them or protecting that information. And if it’s just that here are narrower willy nilly process, have a separate debit card that can’t be used for online purchases and all that, the visa debit card type and you know, you could, you could hand that around with very little risk in the business. Then you’re out 500 bucks if they steal it and quit on you. That’s not a big deal up here. Not off thousands.

Yeah.

What type of access levels can be set up at the bank to reduce risks? Yeah, so a lot of business owners think that they need to give them their banking credentials. So if you need to give, you know, their banking credentials, you can set up an access level with every major financial institution that they have, what we call read only access or some banks would call it agent access and all means the same thing. Whether that means is they can see all the activity so they can help with the bookkeeping, reconciling the accounts. So your understanding if we have enough money but they can’t actually disperse cash, that’s the big one. Can they disperse cash? Can they pay a bill? Can they do an EFT? Can they do a wire transfer? Do they have those sort of credentials? Um, you could set up that agent acts that read only access.

You know, we do outsource accounting functions here. We insist, not only do we have our own credentials, but we have two sets. We have one that can do cash disbursements and one that can do read only access because that allows us as a firm to lock down that one that could do cash disbursements and put a whole bunch of controls on it. But at the same time, you know, make it a little easier to access the information, to reconcile the banks and book the activity that we don’t need more than one person involved, uh, for that state. Uh, that, that part of the process. Why do you need a meeting with your accounting team? Okay. So I’m a big proponent on this and a lot of people think, hey, I’m going to look at a report and I’m going to email and I’ve sold my life in increments of 15 minutes for over a decade.

And I got to tell you, if you would have a meeting and a back and forth discussion with someone, you know, do it in person or by phone, you know, don’t try to do it right. It’s just so much quicker. As a business owner, we’re so stressed for time that we think if we don’t book the meeting with that person doing the accounting, um, you know, we’re going to save time. No, you’re just going to engage in inefficient conversation after or completely avoid the conversation needs to happen. You should have questions for your accounting team each and every month. So just go ahead and book the meeting. You know, we’re going to meet, you know, the third Tuesday of every month at three o’clock. That is the meeting time and you’re going to do it every single month because you should have questions. It doesn’t necessarily need to be a two hour meeting.

But it needs to be at least 50 minutes and you’re going to go through, you’re going to ask your questions, are gonna explain any variances, then you’re going to go back to generating revenue in the business. Don’t wait any longer and Hire A CFO Edmonton today. Uh, this doesn’t have to be a complicated task, but it needs to be done. And the most efficient way is to, you know, have an in person meeting or a set phone conversation that you can have a back, back and forth discussion. You know, investigate any anomalies, look at the source documents, the invoices that are tied to that, and you then move forward with a running your business. So that’s what we have for you here today. You know, thanks again for joining us. As always, you know, we encourage you to hit the light can subscribe button so we can continue to deliver you a tips on how to beat the odds at business. And if you have any questions, you know, feel free to leave them in the comments below and we’ll do our best to address them in future videos. Thanks very much.