Preventing Fraud in an SMB using bill payments control

July 23, 2020
Bill Pay Management, bookkeeping services, Fraud

Fraud is something that most small business owners don’t like to think about and often think, “That can’t happen to me.” However, as we’ve previously discussed, it happens far more often than business owners would like to admit. In small businesses, fraud is the result of lack or absence of controls, which are exploited by an employee. A key process that should be examined as part of a fraud review is the process of how bills are approved and paid. While SMB’s often don’t have proper controls in place, this can easily be addressed by implementing basic controls, which are easy to execute.

Establish accounting processes and procedures

The first thing a business should establish is a separation between the person(s) who approves a bill and the person(s) who pays bills. This very basic practice is often defaulted to giving these responsibilities to one person, who is often times, not the owner. The owner or accounting manager may feel like they are streamlining the process but fail to see the long-term exposure to fraud.

When this happens, the person overseeing this work is also put in a bad position with complete control over the process. With one person approving and paying bills, and the absence of checks and balances, there are numerous ways to syphon funds from the company.

First, they could create a fictitious entity for whom bills are created and paid. This enables them to pay checks to themselves, appearing to be payments to a vendor.
Second, they can create checks that are made out to themselves if they are performing the bank reconciliation.
Third, the employee can also work in partnership with a vendor on creating fraudulent transactions such as multiple invoices or rebates.
Finally, they can charge personal expenses to a credit card and pay the bill without anyone noticing.

Preventing fraud using bill pay controls

So how do you prevent this situation from happening when you’re a busy owner looking to build your business? Begin by realizing that understanding your finances is critical to running a successful business. This doesn’t mean you need to be a finance expert, but you do need to put basic controls in place to prevent fraud.

When reviewing your bill payment process, you may find it’s a lot easier than you may think to create proper controls.

First, separate the bill approval process from the bill payment process. You may even want to do all if yourself (I know, you don’t have time…we’ll get to that next!). When you separate these functions, ensure that the person reviewing the bills cannot access any bank records.
The same goes for the person paying the bills. Once you’ve established the proper process, use an automated bill payment solution to ensure you can audit each transaction and separate duties electronically. These systems are inexpensive and are extremely efficient, but the process you create needs to be correct before implementing any technology.
Last, consult your CPA. While you may not know it, CPA’s have a lot more to offer than simply providing tax and financial review services.

While spending the time to create a strong set of controls may seem like it’s time you don’t have, think of it as an insurance policy. Would you own a home without insurance?

Once these controls are in place, you will see that you gain more insight into the way your company runs as well as a better understanding of you finances. At the end of the day, this will help you build a healthier, stronger business, AND prevent fraud.

Man’s Hand Examining Fraud Word On Financial Report Through Magnifying Glass

Fintech technology is available to help reduce fraud in SMBs

Carly, the automated bookkeeper from Expex, doesn’t just automate bookkeeping tasks, she gives you complete financial visibility, so you can make better decisions. She thinks and acts like a bookkeeper- only smarter, faster, less expensive, and more secure than traditional bookkeepers.

Carly will create stopgaps and tools to mitigate the possibility of financial fraud by:

Eliminating the need for paper checks.
Creating an audit trail for each transaction.
Creating rule-based rights so that the same person does not approve and pay bills.
Limiting expense categories that each user has access to.
Assigning system email addresses that vendors can email bills to.
Restricting access to the bank account.
Creating monthly reports that detail user activity.

Carly Bookkeeping services in Schenectady NY