Management Review: An Effective Antifraud Control in Small Businesses

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cuffsSmall businesses often do not have the resources to implement robust internal controls focused on segregation of duties, causing them to be susceptible to employee embezzlement. A recent article in Fraud Magazine, a publication of the Association of Certified Fraud Examiners, documents how a trusted employee with too much control cheated an unsuspecting small business owner out of hundreds of thousands of dollars. That is, until the scheme was detected through management review.

WHO? The perpetrator in this scheme was a long-term employee in a position of trust with inadequate supervision. These factors fit the profile of many embezzlers.

WHAT? The perpetrator embezzled over $400,000 from her employer over a six year period.

WHY? In documented asset misappropriation cases, a commonly cited red flag is financial stress. That was a motivating factor here, as the perpetrator needed money to fund her lifestyle and cover her spouse’s high medical bills.

HOW? The perpetrator diverted company funds for her personal benefit by altering petty cash checks and using company credit cards to pay for her own expenses. Inappropriate general ledger entries were then used to help cover up the scheme.

So how did the perpetrator get caught? Essentially it came down to changes in the management review process! The owner’s wife had recently become active in the business and, after repeated requests for financial information were ignored by the perpetrator, she requested bank statements and credit card statements directly from the financial institutions. By comparing those statements to financial reports provided by the perpetrator, discrepancies were detected that ultimately led to the perpetrator’s downfall.

As part of our Forensic & Valuation Services practice, Aronson helps clients investigate losses in fraud or defalcation situations. To learn more about our forensic services offerings, contact Bill Foote at 301-231-6299.

About Aronson LLC

Aronson LLC has written 122 post in this blog.

Aronson LLC has been thinking ahead for its clients for more than 50 years. Aronson’s construction, real estate, government contracting, nonprofit, technology and private industry experts provide innovative audit, tax, and consulting services that help its clients move to the next level. From start-up to exit strategy, Aronson works with companies throughout the entire business lifecycle by proactively identifying opportunities and addressing challenges so that clients are able to focus on their core business. Aronson shows companies how to rethink everything to be more profitable, more competitive and better prepared for the future.

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