Tag Archives | fraud

Limited Liability Company (LLC)

See Also:
S Corporation
General Partnership
Limited Partnership
Partnership
Sole Proprietorship

Limited Liability Company (LLC) Definition

A Limited Liability Company or LLC is a business form which provides limited liability much like a corporation. There can be an unlimited number of members to the company. There are also many tax benefits that emerge from forming this type of business.

Limited Liability Company (LLC) Meaning

A Limited Liability Company means that it contains the same barrier to personal liability for actions by an employee or member of the company unless there is a case of fraud or gross negligence. Members are unlimited, but there are limitations in that all members must be domestic. In addition, a member can be anything like a private equity group, corporation, or any individual as long as they are an American citizen.


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Advantages of a Limited Liability Company (LLC)

Limited Liability Company (LLC) advantages range from taxes to the limited exposure by members discussed above. There are tax benefits in that an LLC has the choice of being taxed like a partnership or a corporation. The first option means that the profits and losses will flow through to the members, but this all depends on ownership percentages or an agreement by contract. Therefore, the IRS only taxes members once at the individual level. An LLC can choose to be taxed as a corporation as well. This means that the company would have certain salaries for its members and the actual entity will taxed as a whole.

Another large benefit of the Limited Liability Company is the ability of the company to own its own intellectual property. Because this is a private form, there is also greater protection from being acquired by other companies. This allows the company to grow at its own pace and make decisions without having to worry about pursuit of other companies.

Disadvantages of a Limited Liability Company (LLC)

One disadvantage of an LLC is the cost; it’s typically more expensive to operate than partnerships and/or proprietorships. There are annual state fees when you operate an LLC. In addition, banks usually have higher fees for LLCs than they do for other entities.

Another disadvantage is that you need to separate all records – business vs. personal. The money, meeting minutes, structure, and records all needs to be separate.

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Limited Liability Company

Originally posted by Jim Wilkinson on July 24, 2013. 

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Accounting Fraud Prevention Using Quickbooks

See Also:
Accounting Depreciation
Account Reconciliation
Cash Flow Projections
How to Develop a Daily Cash Report
Future of the Accounting Workforce

Accounting Fraud Prevention Using Quickbooks

A small business owner typically cannot afford to hire enough people to have proper separation of duties to gain the internal controls needed to prevent accounting fraud.

Using Internal Controls

Stephen King, CEO of GrowthForce, says that, “Internal controls can help reduce the risk of fraud, make it easier to train and manage staff, and help your company run efficiently by having solid processes and control activities in place.” The place where most companies encounter fraud is in their own company, so it’s critical that every company sets up internal controls and continues to update them as changes occur.


Download eBook The CEO's Guide to Reducing Fraud


Prevent Accounting Fraud

Every business owner can achieve accounting fraud prevention by taking these simple steps:

1. Open the Bank Statement Yourself

Every small business owner should receive the unopened bank statement. Then they should review each check for authorized payee and signature and approve electronic payments. Only after they do the above should they give it to the bookkeeper.

2. Don’t Let Your Bookkeeper Reconcile the Bank Account

The person who pays the bills should never reconcile the bank account. That’s how they cover their tracks. If you don’t have someone else to do it, then this is an easy function to outsource.

3. Close the Prior Accounting Periods

QuickBooks now has a way to lock down the prior periods. Once you produce a financial statement, that period should be “closed”. As a result, this reduces the risk of hiding a fraudulent transaction in a prior year.

4. Attach Scanned Images to Each Accounting Transaction

Most fraud occurs from check tampering. For example, the bookkeeper changes the payee to themselves. Prevent accounting fraud by scanning the bill and linking it to each accounting transaction inside QuickBooks. Thus, this makes it harder to fake a bill.

5. Set Up Username for Each User

QuickBooks now has an audit trail report which can never be turned off; however, if your staff login as “Administrator,” then you have no idea who made what entry. Set up a username for each user that way you can track who did what and when.

6. Restrict User Access

QuickBooks Enterprise Solutions has the ability to restrict access per user per screen. Make sure you have separation of duties between authorization, record keeping, and custodial responsibilities for each accounting transaction.

No system of internal control should be built on trust. The best accounting practice is to separate out the following functions: authorization, record keeping, and custodial responsibility for assets in each accounting transaction.

The CEO's Guide to Reducing Fraud


Originally posted by Jim Wilkinson on July 23, 2013. 

accounting fraud prevention using quickbooks

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Balance the Balance Sheet

A balance sheet is a statement of the companies health. How does the liabilities and equity compare to the assets? Balancing the balance sheet is a critical part of accounting as it gives the company, bankers, and investors an idea of how the company is doing. Does the balance sheet need to balance? Yes. It always needs to balance; otherwise, it’s an indicator that either something was forgotten or there is potential fraud.

Purpose of Balancing the Balance Sheet

The purpose of balancing the balance sheet is to create a snapshot of the company’s financial status. It highlights three important categories: assets, liabilities, and shareholder’s equity. In other words, the balance sheet looks at what the company owns, how much it owes to debtors, and how much is invested.

Before we go into how to balance the balance sheet, we need to know why we need to do that. It all comes down to double-entry accounting.

An important part of the financial leader’s role is to know the economics of the company. Access our Know Your Economics Worksheet to shape your economics to result in profit.

How to Balance the Balance Sheet

Use the following formulas to calculate each categories (assets, liabilities, and equity):

Assets = Liability + Equity

Equity = Assets – Liability

Liability = Assets – Equity

First, make two columns. In the first column, list your assets. In the second column, list both your liabilities and owner’s equity. Each column should balance to one another.


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Reasons Why Your Balance Sheet Is Out Of Balance

If your balance sheet isn’t balanced, then you want to look in particular areas for inconsistencies. Some of these areas include retained earnings, loan amortization issues, paid in capital, and inventory changes.

Retained Earnings

Retained earnings can be tricky at times. After all, it is supposed to be the sum of all your net profits/losses ever since you began the business. If you have an accurate record of every number since you began, then this shouldn’t be a problem. However, a far to common problem is that some businesses do not have all the data required to calculate retained earnings. A common practice for this situation is to use retained earnings as a plug number and make it what it needs to be in order to balance the balance sheet.

Paid In Capital

Some people have misunderstanding of what “Paid in Capital” is, and one simple way to define it would be: The amount of money that was invested in the business to get you started. It can either be your own personal investment, or it can be capital contributed by investors. The sum of all initial investments should be under Paid in Capital in the owner’s equity section of the balance sheet.

Inventory Changes

One common mistake that some people forget to consider is inventory changes.  It might seem simple to just take a count of whatever inventory you have at the moment, but that may be inaccurate. If you are working towards financial projections, then you will need to predict future inventory amounts as well, and this will affect your balance sheet. A change in inventory also affects your cash flow statement. What you need to do is take the amount from last month’s inventory and subtract the amount from this month, then reduce your cash balance by that amount.

How to Protect Against Fraud With a Balance Sheet

After various global fraud scandals in 2002, the U.S Congress passed the Sarbanes-Oxley act which protected investors from the risk of fraud by corporations. It mandated strict improvements within the financial disclosures of corporations. It was responsible for the improvement of the following areas: corporate responsibility, increased criminal punishment, accounting regulation, and new protections.

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Marketing Fraud

See also:
Intangible Assets: Protecting Your Brand and Reputation
The Red Flags of Fraud
Dealing with Employee Fraud
Marketing Plan
7 Warning Signs of Fraud
Marketing Mix

Marketing Fraud Definition

The marketing fraud definition is the false promotion of a product or service and/or the making of false claims. Some of the most common forms of marketing fraud is selling authentic versions of a product for it to only be an imitation or knock-off brand. This issue of false advertising led to the famous expression, “if it’s too good to be true, it probably is.”

Mass Marketing Fraud Explanation

There’s a significant difference between marketing fraud and mass marketing fraud. The US Department of Justice defines mass marketing fraud as “any fraud scheme that uses one or more mass-communication methods – such as the Internet, telephones, the mail, or in-person meetings – to fraudulently solicit or transact with numerous prospective victims or to transfer fraud proceeds to financial institutions or others connected with the scheme.” Marketing fraud can occur anywhere as it doesn’t need to reach a massive amount of people for people to fall for it. But mass marketing fraud is typically hosted on a web-based platform (email, telemarketing, internet, etc.).

Examples of Marketing Fraud

Some examples of marketing fraud include exaggerating claims, false advertising, and misrepresenting the product. Although it is sometimes difficult to see your own company’s marketing fraud,  it is easy to identify other company’s participating in this fraud. Ever seen a commercial for the next supplement that will magically loose weight? If you pay attention to what they are saying, then you may find that they do not mention medication, prescription, FDA, etc. All you hear is about the results, the method, and how taking it will give you six pack abs.

How to Prevent Fraud in Your Marketing

When a company deals with marketing fraud, there are a myriad of issues that stem from it. Some of those consequences include bad reviews, customer backlash, lawsuits, and even prison time depending on the severity of marketing fraud. Needless to say, your company needs to have processes in place to prevent fraud in your marketing because it can have financial repercussions. As the financial leader in your company, you need to know know what marketing fraud looks like and how to flag it if it’s happening in your company.

Know What Marketing Fraud Looks Like

Before you can prevent fraud in your company, you need to know what marketing fraud looks like. It can come in the form of overnight engagement sensation on social media, significant boosts in traffic or followers, and emails made to look like they are coming from someone else. For example, a company that uses social media heavily got 20,000 more followers in a day. That company also saw a 400% increase in comments (and those comments all raved about the product being sold). Although some companies may naturally experience this, you may want to look at the quality of followers you have and if they are even real. Unfortunately, some marketers manipulate the analytics to please the financial leader. But that is fraud.

Flag That Company

If your company is dealing with marketing fraud, then it is destroying the value of your company. But you do not have to continue in old habits anymore and can remove those “destroyers” of value in your organization. Download your free Top 10 Destroyers of Value guide to avoid letting the destroyers take value away from you.

Marketing Fraud definition

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Financial Leaders and Cyber Security

Does your company bank online? Have QuickBooks or PeachTree online? Take credit card transactions online? Have any financial information online? Have a website or an email address? If you answered yes to any of these questions, you are at risk for a cyber security threat.

It’s no question that as technology evolves, the issue of financial leaders and cyber security becomes more important to deal with. There have been countless companies in the last 10 years that have experienced cyber security issues.

But what do financial leaders and cyber security have to do with one another?

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Financial Leaders and Cyber Security

In December of 2013, Target experienced a major security breach where over 40 million credit card numbers were stolen. Apple battled the United States government in the San Bernardino case because creating a back door would open Apple’s customers to huge security risks. In late 2015 into 2016, Home Depot had 56 million credit card numbers stolen over the course of a 5-month period.

Even though Target, Apple and Home Depot are large companies, small companies are also a major target for cyber attackers. Just in Houston, I’ve come across stories of impersonation of an entity to capture checks, tales of credit card breaches and email hacking, and these are only a few examples.

Cyber Security Definition

Cyber security is defined by Wikipedia as “the protection of computer systems from the theft or damage to the hardware, software or the information on them, as well as from disruption or misdirection of the services they provide.”

The issue of cyber security is ever growing. Hemanshu “Hemu” Nigam, founder of the security advisory firm SSP Blue, estimates that this industry will reach $170 Billion by 2020. There’s a reason for this growth though: an increased supply of hackers and the security threats they cause creates increased demand for cyber security tools and programs. Just like you would install a security system to protect your home, it’s important to create a wall of protection around your web-based assets.

How It Impacts Financial Leaders

Cyber security and financial leaders are not often associated with one another. But if we break it down, cyber security threats occur primarily because of one reason – money. As a financial leader, it is your sole responsibility to safeguard the financial assets of the company.

Managing cyber security is a necessary evil that can sometimes add up to a sizeable expense on your income statement. Ideally, you need to protect everything in your company. But if you are a small business owner with a only couple of employees, that may not be an option.

Consequences

There are two types of consequences to a cyber attack or threat: immediate and long-term. Both of these need to be quantified. What will it cost you to deal with the immediate crisis at hand (stolen credit card numbers) as well as the long-term damage to your reputation?  It’s easy to see how the costs of a breach can add up.

Conduct an external analysis to discover areas that outsiders might find attractive to penetrate. Where are you vulnerable?  Just like you would protect your social security number from identify theft, protect the financial integrity of your company.

Don’t skip evaluating all external factors that can impact your company. Download the External Analysis whitepaper to learn how to start.

Cyber Attacks

The US Department of Homeland Security warns that,

Cyberspace and its underlying infrastructure are vulnerable to a wide range of risk stemming from both physical and cyber threats and hazards. Sophisticated cyber actors and nation-states exploit vulnerabilities to steal information and money and are developing capabilities to disrupt, destroy, or threaten the delivery of essential services. A range of traditional crimes are now perpetrated through cyberspace. This includes the production and distribution of child pornography and child exploitation conspiracies, banking and financial fraud, intellectual property violations, and other crimes, all of which have substantial human and economic consequences.

Types of Cyber Attacks

Cyber attacks of various forms are recognized as a real problem that destroy a company.  But what are some examples of cyber attacks that impact financial leaders?

  • Corporate Security Breaches
  • Malware
  • Phishing
  • Social Media Fraud
  • Advanced Persistent Threats (APT)
  • Individual Wiring Attacks

Phishing

Phishing is an email scam that retrieves access to your computer after clicking a link. This is like opening the back door for thieves to take your TV, computer, prized possessions, etc. from your home as you sit on the couch watching.  These sinister emails often play upon fears that if you don’t click the link some sort of harm will follow.

You’ve probably received phishing emails personally, but can it really be a business issue?  Imagine receiving an email saying that your company website is being used for spamming and spreading malware and that you need to download a report to check it out.  Your first instinct is to protect your company’s reputation, so you are understandably alarmed and tempted to check out the report.  Sensible financial leader that you are, though, you realize that this is a scam.

Sound far-fetched?  It happened to a client last week…

Other types of cyber-fraud

Companies experience impersonations or social media fraud which can severely impact a company’s image, brand, and reputation.

Have you ever seen those emails where a superior grants you access to wire a large sum of money into an account? This type of attack targets individuals rather than the company; but the company still loses out.

How to Prevent Cyber Attacks

As firms get larger, hackers, phishers, and cyber-attackers start to target them. Another way to prevent cyber attacks is to vet who comes in the door in the first place.  Criminal background checks, monitoring of access, and password difficulty are all ways to reduce the risk of attacks, increase the limits of the flotation of financial information, and decrease the ease of accessing company documents.

If you feel that you’re at a greater risk for attack, get cyber insurance to help mitigate the costs and expenses associated with recovery.  Not only does this cover expenses if you are attacked, you will need to put preventative measures and best practices into your firm to decrease the risk of attack in order to get the policy in the first place.

Harvard Business Review’s Take

HBR argues that most cyber threats occur internally. Therefore, financial leaders need to see these internal attackers as an external force that has infiltrated the company. HBR suggest starting with the basics to prevent cyber attacks. While keeping communication open between team members is key for a transparent environment, being too naked will tempt a team member, such as Bob the accountant, to steal information for his own benefit.

Because business consists of humans, it’s important to realize how flawed people are. Analyze your team’s habits, current life status, and anything else that might cause them to act out. If you work with them daily, then acknowledge their cyber and interpersonal activities. If you begin to see them change those habits, then raise up a flag because there may be an issue that could damage your company.

Even well-intentioned employees can cause harm if they are uninformed.  Educate your team on the various ways that scammers can attempt to breach your company, particularly through phishing emails.  Encourage them to check their social media and personal email accounts on their own devices while on breaks to minimize the exposure of company data to outsiders.

Conclusion

Cyber attacks are a real external threat for companies of any size.

To mitigate potential damage, it’s important to put into place practical prevention tactics. But where do you start?

Begin by educating employees (especially those with access to financial information), creating difficult to crack passwords, updating any software/plugins/compliances, and being aware of areas of vulnerability.

Once you are able to identify areas that hackers might infiltrate, it’s time to start building a strategy to respond. Download the free External Analysis whitepaper identify those areas. Overcome obstacles and be prepared to react to external forces.

Financial Leaders and Cyber Security

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Financial Leaders and Cyber Security

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The Red Flags of Fraud

Businesses lose millions (if not billions) of dollars due to fraud. But how do so many cases of fraud go unnoticed until the damage is done?  Often, it’s because businesses don’t recognize the red flags of fraud soon enough.

Working with many entrepreneurs and their companies for the past 25+ years, I have unfortunately have come across numerous instances of fraud in companies.  The harsh reality I’ve discovered is that if an employee wants to commit fraud, they can do it.  It’s just a matter of how easy you make it for them.

If you suspect there may be fraud in your company, start by confirming that your unit economics are in line with expectations. Download the free Know Your Economics guide to break down what’s going on in your business.

Red Flags of Employee Fraud

One of the most noticeable warning signs of fraud is employee behavior.  Do they act controlling or feel the need to over-compensate their role?  If your employee needs to have sole responsibility, or if he or she needs to have the final say in a decision, it’s probably a good idea to monitor that employee’s activity to determine the reason for their behavior.

Here are some other behavioral signs of fraud to look for:

Refusal to take mandatory vacation or sick leave

Coworkers and managers love an employee who never takes a vacation and works hard.  Many of us wouldn’t question this behavior because it’s getting us faster results.  Sometimes, what looks like hard work is actually an employee covering their tracks.  Employees, particularly those working in a position where fraud is more likely, should be required to take time off.  This not only short-circuits fraudulent activity, but it ensures that employees are cross-trained.

Employee lifestyle changes (new house, expensive jewelry, cars or home)

According to a 2014 Global Fraud Study, 43.8% of occupational fraudsters live beyond their means. Does your employee have a better house than you? What about his or her car? Here’s my general rule of thumb: if your employee has nicer belongings than you, that’s a red flag. It’s time to check your books.

One time, I recommended to one of my clients that she should outsource her payroll to an external payroll service. I usually recommend this because it’s easier and less-prone to fraud. Rather, my client declined this suggestion and claimed that she could do payroll better than a service.

This client always dressed nicely, to the T. She’d walk in with a kind of confidence and drove a nice car (nicer than her boss!). Everyone saw her as a nice person, because she offered to stay back and let the cashiers go home.

Seems like the perfect employee, right?

Actually, it turns out that she had been cashing checks to herself by voiding cash transactions and pocketing the cash. See what I mean? If your employee has nicer belongings than you, that’s a red flag. It’s time to check your books.

Significant personal debt and/or credit problems

Ideally, a company should perform background and credit checks before hiring. However, some companies just don’t want to go through the paperwork.

For example, one client I had never made copies of their original checks. When I did my audit, I found half a dozen missing checks. The controller had been running the checks for his own personal use.

One day, the controller went to lunch and never came back. After running a background check, we found out that he was convicted of embezzlement five years prior.

Borrowing money or requests for pay advances

In the same study, 33% of occupational fraudsters have financial struggles or difficulties. When a fraudulent employee steals or “borrows” money, oftentimes he or she will rationalize. “It’s okay, I’ll just pay them back later.”

For instance, let’s say someone is in charge of a company credit card and uses the company credit card on accident. When she gets to work the next day, it’s written off. No one questions the personal expense. So then a pattern begins – an accumulated rationalization that she will “pay it back later.”

Easily annoyed at reasonable questions

If an employee snaps because of an obvious or reasonable question, he or she is likely suffering from guilt or preventing the questioning from going further into detail. If this ever happens, keep asking questions. You’re bound to get the answer you’re looking for (even if you don’t like it).

There are many other signs or “red flags” that you should be aware of. However, controlling behavior doesn’t always reflect fraudulent employees. Basically, all you need to know is: be careful who you trust, be aware of your employees’ behaviors, and know your economics.

Where are the red flags in your financials? Calculate your unit economics with our free guide!

How to Prevent Fraud

Outsource your Payroll

Payroll processing is a hot area for fraud to occur.  Because of this, I recommend payroll to outsourced companies because it’s easier to prevent fraud. Instead of keeping track of multiple employees’ checks, you only have to write one. The person writing the checks (you) is not the same person running the transaction.

Know your Economics

If you are regularly checking to see that your unit economics are in line with expectations, it’s more difficult for fraudulent activity to go unnoticed.  Anomalies will come to light and be investigated and resolved sooner.  Creating an environment where business performance is closely monitored discourages fraudsters much like an alarm system on your house discourages burglars.  If you perform a consistent audit within your company, you’re less prone to fraudulent activity.

Perform Background and Credit Checks

Save yourself the heartache of dealing with fraud in your company and invest in a regular background check process. You never really “know” your new employees until you’ve worked with them for a couple of years, but at least you’ll have their “red flag” behavior in writing.

Conclusion

In conclusion, security is not only an issue externally. Here are a few key points to take with you: If your employee in a position of trust has a nicer car than you and nicer clothes, check your books. Stay aware of your employees’ behavior. Be prepared – do background and credit checks on your new hires. And finally, don’t wait until a crisis to know your economics. Want to create an environment that discourages fraud?  Keep track of your company’s economics with our free guide and start taking a closer look at what’s going on in your business.

red flags of fraud

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Does fraud follow economic cycles?

Does this sound like your business lately?  Sales volume is down.  Cash is tight. The company is losing money.  And just when you think things can’t possibly get any worse, you discover that one of your employees has committed fraud… Sadly, this scenario is all too common and begs the question of whether fraud is more likely to occur when the economy slows down.

Economy down, fraud up?

A survey conducted by Deloitte & Touche in late 2008 showed that 63% of the firm’s clients expected an increase in fraud related to the global financial crisis experienced in that year.  This would seem to indicate that, at a minimum, people expect more fraud to occur during an economic downturn.

However, it may be that fraud is simply more likely to be discovered during times of economic stress.  When business is good, people don’t tend to question anomalies as thoroughly and small frauds might even be dismissed in an effort to maintain focus on growth, not problems.  But when money is tight and management is kicking over every rock looking for profits, it’s much harder to conceal fraud and companies are willing to go after fraudsters to recover precious lost resources.

Public perception of fraud can also make it seem as though there’s an uptick in fraud in lean times.  During a downturn, most economic news coverage is negative.  Discovery of fraud certainly contributes to the tone of the times and is often a lead story during such periods of stress.  Additionally, improved fraud detection measures (think Sarbanes-Oxley) have helped increase the actual number of frauds detected, hence the appearance that more fraud is happening.

So what actually causes a person to commit fraud?

Fraud Triangle

fraud triangle

The Fraud Triangle, first set forth by Donald Cressy, describes three factors that are present in every situation of fraud:

  1. Pressure – the need for committing fraud (need for money, etc.)
  2. Rationalization – the mindset of the fraudster that justifies them to commit fraud
  3. Opportunity – the situation that enables fraud to occur (often when internal controls are weak or nonexistent).

In order to break the fraud triangle, an organization must remove one of the three elements of the triangle.

Pressure

Many things may contribute to the pressure to commit fraud during troubled economic times.

  • Pressure to meet goals
  • Demand for increased productivity
  • Fear of losing job
  • Reduction in salary

Any of these or a host of other factors could pressure a person into biting the hand that feeds them.

Rationalization

How does a person justify theft from their employer?

  • My company can afford it
  • Times are tough
  • My goals are unattainable
  • Revenge

Particularly during a downturn, it’s not terribly difficult for a dishonest person to find a reason to steal.

Opportunity

Times of economic stress present many opportunities to commit fraud that might not be present during better times.

  • Less people doing more work = lack of oversight
  • Same level of supervision over more people
  • Middle managers (supervisors) are generally the first to be cut
  • Battlefield promotions of un- or under-experienced people

It’s important that companies realize the risks associated with cutting resources and take steps to ensure that internal controls aren’t compromised.

(Find out what the 7 Warning Signs of Fraud are!)

An Ounce of Prevention…

So what’s a company to do?  There are several fraud-prevention tactics that can be used, both in good times and in bad.

  • Review internal control policies/procedures
  • Get a handle on crucial resources
  • Monitor key metrics for anomalies

Most fraud prevention scenarios focus on removing opportunity by strengthening internal controls. While this is a great first-line defense against fraud, it’s also important that a company take stock of its resources (like cash) to establish a baseline from which to measure changes.

It’s hard for fraud to hide out when management is tracking key drivers.  Fraud will usually cause a blip in key metrics, but if those metrics aren’t being watched, the blip could slip by unnoticed.  Not sure what you should be tracking?  Check out our free KPI Discovery Cheatsheet below.

does fraud follow economic cycles

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does fraud follow economic cycles

Whether or not fraud actually follows economic trends is up for debate.  The good news is that there are steps that a company can take to minimize the likelihood and impact of fraud.

Leave us a comment with your fraud prevention tips below.

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