Small Business Fraud: Does Aunt Mavis Have Her Hand in the Till?

by J_Pratt

Manon Phone Final Notice

In recognition of ACFE’s International Fraud Awareness Week (November 6-12, 2011), we offer the blog article below focusing on small business internal (occupational) fraud, which according to the ACFE’s 2010 examiners report ranks highest in frequency of all businesses at 31%.

Mavis Farquar is a bookkeeper for a small business. She’s been an employee for 25 years. She has attended every baby shower, wedding, graduation and bar (and bas) mitzvah and a few funerals of the owners’ and other employees’ families. She remembers everyone’s birthday with a cake and gives homemade gifts to everyone on the holidays. The owner’s kids call her “Aunt Mavis” and she always has some treat for them in her desk. The owners think of her as “family”.

Aunt Mavis is responsible for collecting receivables (e.g., payments from clients) from the company’s post office box, recording them in the company’s books, preparing the bank deposit, making the deposit and reconciling the bank’s monthly statement. She’s been doing this job for nearly all of her 25 years of service and has the owners’ full confidence. They never question, review or audit her work.

And it’s a good thing for Mavis, because she’s been skimming off the top for years.

Of the 27.5M businesses in the U.S., 99.7 percent are considered “small businesses” (i.e., under 500 employees)[1]. Over 5M of these businesses have less than 20 employees. Many business owners do not stop to think that a trusted employee would take advantage of their trust. But “bookkeeper fraud” is one of the most common types of embezzlement, especially in smaller companies.  While the bookkeeper may only be taking small amounts of funds at a time, they can add up over time, and these losses can easily result in bankruptcy for a small company.

If you are a business owner, no matter how small (or large) your staff might be, certain basic financial controls are critical:

  • ­Separation of duties. This is a key concept followed by every well-run organization in their accounting processes. It means assigning the responsibility for the handling of financial processes among two or more employees so that there are always control points against error – or fraud[2]. For example, the employee posting payments to customers’ accounts on the company’s accounting system should be different from the person who prepares the bank deposits, who should be different from the person who reconciles the monthly bank statement.
  • Keep the company checkbook under lock and key at all times. Limit access to the checkbook only to those who have authority to sign the checks.
  • Use bank services such as Image Positive Pay to make sure all company checks presented for payment have been authorized appropriately and that amounts and payees have not been altered.
  • Keep up on past due accounts and follow up with customers promptly to make sure any payments they make are posted correctly to their accounts.
  • Supervise your staff closely.  As soon as you hire staff, you are responsible for what they do on behalf of your business. Besides being a florist, a plumber, a dentist or a restauranteur, you are now also a businessman/woman and need to be involved in the management end of your staff.
  • “Trust but verify”. Be sure your employees understand you aren’t instituting controls because you don’t trust them. You are instituting controls to protect them. With the right controls in place, the likelihood that an employee will be suspected of wrongdoing is minimized

Ignoring controls can be costly not only for the loss itself, but for the court costs of trying to recover the funds, which are seldom very successful. The right controls are easy to maintain and prevent these situations from occurring.

[1] U.S. Small Business Administration, FAQs: Frequently Asked Questions,

[2]There are a number of excellent sites explaining different aspects of separation (or segregation) of duties including To find others, just search for “separation of duties” or “segregation of duties” through your browser.