Matt Michel: 18 ways to prevent being a victim of internal fraud

The Association of Certified Fraud Examiners (ACFE) reported that 5% of all business revenue is lost to fraud, which is a huge number. Worse, more than a quarter of the plumbing contractors reading this column will fall victim to business fraud. Here are 18 ways to ensure you are not one of the statistics.

Take inventory regularly. Control your shop inventory and truck stock. Use bar coding to facilitate fast inventory counts and take inventory regularly. No one likes taking inventory, but discovering it grew legs and walked away is worse.
Require employees to use personal credit cards. Do not give out company credit cards. It is better to pay the fee for an employee’s personal card annual fee to eliminate the potential for credit card fraud.
Change passwords regularly. For your own credit card, bank and other accounts, change passwords regularly. Even better, use a password wallet that will create unbreakable passwords (you only need to remember the password to the wallet).
Use a P.O. Box. Use a post office box for business mail and get mail yourself. You may move your business location from time to time through the years, but you never have to change your P.O. Box, so you never have to change your mailing address. If you do not want to use a P.O. Box, then have your bank statements and IRS mail sent to your home address.
Keep a secure petty cash box. Petty cash is useful, but has a way of evaporating. Keep it in a secured box and limit access to the key.
Limit check signatures. Only the owner should be able to sign checks for a small company. The owner should also be the person with the checkbook and/or blank check stock for computers. As the owner, you should scrutinize every check you write.
Use positive pay. Some banks use a positive pay system where checks must be logged online when they are written or the bank will refuse to honor them. This double validation of your signature and online authorization will dramatically reduce the potential for check fraud.
Use an outside CPA. Another good check and preventative step is to use an outside CPA or professional accountant to complete your books and balance your accounts. If something does not add up, a CPA is likely to catch it.
Create an approved vendor list. One of the ways fraud is conducted is when companies pay phony invoices to fake companies or companies that may be legitimate, but are owned by a friend or relative of an employee. Only pay invoices from a list of approved vendors and only you should approve who makes the list.
Create an approved purchaser list and P.O. system. Some plumbers do side jobs using material the company buys. Eliminate these by informing every vendor exactly who is authorized to make purchases. Also, create a purchase order system where every order is logged sequentially. Inform your vendors that a purchase order is required for every purchase.
Watch for missing numbers. Checks, company invoices and purchase orders should all be sequentially numbered. If a number is missing or out of sequence, find out why.
Stamp checks immediately. As soon as you receive a check, stamp it for deposit only. Make sure you take checks and cash deposits to the bank.
Follow up on turn downs. One of the tricks of the unscrupulous plumber is to inform the customer of the problem and tell the customer that he can save him money by returning later. When your plumbers return with service call or response charges only because the customer turned down the work, follow up. This is good practice anyway. If the turn down was legitimate, you might be able to convert it.
Check service vehicle MPG. Either require your plumbers to log mileage when they fill up the gas tank or use GPS to check miles driven between fill ups and gas used. This is to ensure that no one is filling up a personal vehicle on a company fuel card.
Conduct background checks. Do not take short cuts on background checks when hiring. Conducting background checks may make it harder to put butts in trucks and people do make mistakes. Nevertheless, a background check will find out if people are being honest about past mistakes, which is a huge red flag.
Run credit checks. Anyone who handles money or is involved with the accounting system needs a credit check as well. When people are desperate, they do desperate things.
Subscribe to a fraud hotline. One of the best preventive measures of fraud is the knowledge that someone is watching. Even the potential that someone is watching removes temptation. For this reason, sign up for a service with an anonymous fraud hotline. The Service Nation Alliance operates one for its members. Other groups might as well.
Do not compromise. When fraud does occur, there can be no compromises on your action. Prosecute. Let your team know you prosecute. This prevents future occurrences. If you do not want to prosecute a family member who is caught taking a five-finger discount, then terminate the family member and insist on full restitution. The family member must pay back what was taken.