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How to stop fraud in your retail biz

Before you expand, be sure that your business has solid internal controls in place. Don't allow the same employees to do receiving, classifying and pricing without proper check and balance.
By Henry Ong |
How to stop fraud in your retail biz

Q: I run a small secondhand bookstore, and I want to have a chain with outlets in several cities, hopefully in three years' time. I let my employees receive, classify and put the price tags on the books when they arrive to the store. This worked for some time, but when some of my first employees left, the system of receiving, classifying and pricing deteriorated. Meanwhile, I have noticed some discrepancies, between the number of books I bring in and the sales I make. What should I do to get my business back on track?

 

A: The discrepancies are due to lack of internal controls in your company. You allowed your employees to do the receiving, classifying and pricing without proper check and balance. Is the employee receiving the inventory also the one who records your payables? He can simply take home some inventory without you knowing, report that the books were received in order, and then ask you to approve payment. 

Before considering expanding your business, first strengthen the internal control environment in the company. Employees should be made accountable in every task they do and must comply with all your audit and documentation rules. An effective way to implement internal control is to separate duties that have conflicting functions to reduce risk of fraud and misappropriations.

-The duties for receiving day-to-day cash collections should be separated from the duties of deposit preparation and bookkeeping. If your accounting staff is limited, ask your admin staff to do the bank deposits. You also need to segregate the duties of preparing check requests from check approvals. Assign someone to do the check preparation, and then personally approve and sign the checks.

-The petty cash is one account that you need to carefully monitor because employees tend to abuse this the most. Since this involves purely cash transactions, employees may borrow from the account without proper authorization. Sometimes advances are given but are not liquidated. Makes sure that the custodian of this account has no access to bookkeeping. You also need to conduct cash counts regularly.

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-Employees involved in the purchasing functions, must have nothing to do with disbursement activities.

-The duties of processing payroll must be segregated from duties of approving it. Normally, as owner of the business with limited manpower, it is you who must approve all payroll-processing requests. Verify the accuracy of the computation. Compare the actual salary for the month against your budgeted payroll to identify any potential anomaly. 

Henry C. Ong, CMA, RFP, is president and COO of Business Sense Inc, a financial advisory and consulting firm. 

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