What sort of prevention can I put in place to prevent internal fraud and maximize transparency in a small business?

April 18, 2009 6:34 AM

What sort of prevention can I put in place to prevent internal fraud and maximize transparency in a small business?

I'm about to start a small import/export business with some friends oversea. I am in charge of purchasing from Asia and them selling in the U.S. under a different entity for tax purposes. Therefore, both sides will have different set of books as we are technically separate businesses. What sort of prevention can I put in place to prevent internal fraud and maximize transparency? I've seen my father's family business destroyed due to a lack of transparency and money were secretly siphoned out into falsely created phantom businesses and bank accounts. How easy is it to find loopholes for internal fraud? If cost is not an issue, would it be best to outsource accounting to a third party to ensure credibility? If I were to seek professional advice before I step into this, who should I be consulting? Any advice on accountability and checks and balances in small business would be greatly appreciated.

posted by willy_dilly to Work & Money (3 answers total)

An accountant with some background in auditing small businesses will have in depth knowledge of internal controls, and this is who you should be asking for advice in your particular situation. Look to a smaller firm (not Big 4), as they are the ones who deal with smaller businesses. You may or may not want them to do the accounting for you, but they should be happy to advise you on internal control concerns.
posted by jeather at 7:30 AM on April 18, 2009

You need different people doing the money in and the money out. Try to have them work separately, in different offices. Even if this means hiring two part time bookkeepers rather than one full time bookkeeper, it is the best way to prevent (maybe not eliminate, but reduce) bookkeeping fraud and embezzling.

Also jeather's advice is good. An accounting firm can serve as consultants re: internal controls. You also want to make sure you have an accountant to a yearly audit, even for a small business.

Good luck with the business!
posted by ohio at 8:09 AM on April 18, 2009

You've got inventory, so you need internal controls over inventory -- is it easy to steal? do the same people have access to the inventory and the accounting records? Who records transactions, and can they be deleted or added at a later period? Does your computer system have good controls, and is it being checked over? As ohio mentioned, is there good segregation of duties, inasmuch as is possible in a small firm?

A lot depends on exactly what you selling, how you are buying and selling it -- different things are of different importance depending on the company.

If this is something of great concern to you, then you should absolutely ask a professional who will understand your needs, and who can instruct you on effective implementation. I strongly recommend you do this.

You are unlikely to need a yearly audit, though you might need a yearly review. This will depend on who you work with -- will you all agree to have your books audited or reviewed yearly? -- and any loans you might get. I believe but cannot swear to it that an auditor can review your books even if they are also consulting for you.

This is not professional advice.
posted by jeather at 12:30 PM on April 18, 2009