Academic journal article Journal of Accountancy

Small Business Clients at Risk

Academic journal article Journal of Accountancy

Small Business Clients at Risk

Article excerpt

Small businesses are the most vulnerable to occupational fraud and abuse and suffer disproportionately larger losses as a result, according to the 2004 "Report to the Nation on Occupational Fraud and Abuse" prepared by the Association of Certified Fraud Examiners. Compounding the problem, small businesses are less likely to have the ability to survive such losses.

CPAs are often the first resource small businesses contact when they suspect fraud has occurred. This is particularly true for small nonpublic clients that may not have the internal audit or human resource departments that are familiar with the processes and procedures to be followed in such circumstances. How should CPAs advise such clients? First and foremost, they should caution against reaching any conclusions until the alleged incident is investigated thoroughly Then they should follow this step-by-step process. The CPA can perform steps one and two concurrently

Step one: Determine the initial facts and circumstances

* How did the client become aware of the suspected fraud?

* How might this fraud have occurred?

* Are the allegations credible?

* Can you identify the possible indicators of fraud?

* Are others aware of the suspected fraud?

* Could others be involved?

* Are there changes in the suspected employee's lifestyle?

* Were background checks performed?

* What are the estimated losses?

* Who are potential witnesses?

* Can another employee substitute for the suspect temporarily?

Step two: Seek the advice of legal counsel to avoid potential litigation

* Is the suspect an employee at will, or is there a valid employee agreement?

* Are policies and procedures in place to deal with termination?

* Can the employee be placed on administrative leave?

* Are there policies and procedures regarding the expectation of privacy?

* Is fidelity bond coverage applicable in this situation?

* What procedures should be followed in investigating the allegations?

Step three: Investigate the allegations

* Under counsel's direction, perform office searches, review e-mail correspondence and interview the suspect with at least two people present. …

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