As the businesses grow wider with multiple branches, outlets or business verticals, controls become tougher and give birth to financial leakages, internal frauds and internal financial misappropriations.
We had listed the most common reasons for such internal frauds in businesses, found through our audits and experience and we are suggesting some methods to manage it.
1. Lack of Financial Controls, No Accountants or Accounts Not Maintained
Managing correct books of accounts is the first and most critical thing to have financial control. Many of the small businessmen feel that they are in complete control of their finances even without maintaining the books. Many believe that having the knowledge of the cash flow is sufficient. Cash flow is only one dimension of the many finance management and control mechanisms. Accounts always follows a principal of balance of credit and debit. Any imbalance clearly shows that there is a difference like Sales to Cash/ Bank/ Credit, Purchase to Cash/ Bank/ Credit, Expense to Cash/Bank etc.
Hence its utmost important that accounts be maintained by a person having good accounting knowledge and the business owner has a basic knowledge of accounts and reviews it at a frequency, minimum on a monthly basis.
2. Non Availability of Software or Improper Usage of Software
To enable correct book keeping there are simple software’s available to manage your accounts and inventory at a price of less than around less than 2500 AED. These software’s can be used with basic accounting knowledge.
In addition, it would be sufficient if an outsourced accountant/ auditor verifies the correctness of entries and tallies the same with cash/ bank/stock on monthly basis and reports to the owner.
3. Lack of Knowledge and Involvement in Reviewing Key Financial Figures
Accounts in not a rocket science. Every business owner must have a basic understanding of the accounting terms and figures. If not reviewed on a timely basis (at least once a month), you stand a high risk of fund leakage. More so, when the internal employees know that there is no review that gives opportunity for them to manipulate the figures.
Be always aware of your cash and bank tally with your account books, if needed on daily basis. Keep a track on the incomes/ expenses/ gross and net profits. Check if they are tallying with your cash/ bank/ stock / payable / receivables.
4. No Clarity in Customer Receivable and Supplier Payable
Sales not booked or higher expenses shown through fake bills is the most common reason for cash leakage for small amounts. But for big amounts its payment received from customer in cash and not accounted and amount accounted as paid to suppliers but not paid. We found that huge amounts have been syphoned off. Hence its important that there is a system of balance confirmation with all the customers (if receivable) and suppliers (if payable) on a monthly basis and specially before the employee goes on leave or leaves the organization.
5. Cash Transactions
Cash transaction is the one which does not leave any trail. It only depends on the person telling the truth or lie. Easy availability of cash opens opportunity of leakage. More cash more expense, more leakage.
Hence, fix limits to your cash transactions and transact cash with reliable people.
6. Improper Method of Stock Maintenance and Management
Stock cannot be counted every day. In cases, working capital of 4 to 6 months is held in stock. Without security and proper inventory control methods, stock can be en-cashed and will be very difficult to find.
Have a person to verify the material coming in and going out with proper gate entry by security person.
Keep the stock in a systematic way so that it can be checked with the system stock at any time.
Conduct random check of inventory for the fast moving and high value items at a random interval. Higher the frequency, better is the control.
7. No Audit Mechanism
We trust our people and in most of the cases the maker is the checker. In other words, we find that the fence itself is eating the grass.
It’s always important that there is a maker-checker mechanism. Quarterly internal audit is a good idea or at least an annual financial audit. Spend some money on audits, it’s worth it.