Detecting Internal Fraud

By Jim W. Norman, CPA



Many business owners feel that fraud and embezzlement are problems that happen “to those big businesses.”  Not so, is the conclusion of the 2002 Report to the Nation on Occupational Fraud and Abuse issued by the Association of Certified Fraud Examiners.


Their study shows that small businesses are the most vulnerable to fraud and abuse with asset misappropriation accounting for 80% of the losses.  The favorite asset? Cash. It makes up 47% of assets misappropriated with inventory and supplies making up another 38%.


Much of this activity is due to occupational or internal fraud. Quite often internal fraud is easier to prevent than to detect.  Most schemes can be prevented with basic accounting controls, audits, and proper oversight.  Of course physical protection and custody of assets such as cash, inventory, and supplies are important, but often the fraud is perpetrated by those charged with that oversight – a manager, the in-house accountant or bookkeeper, or any trusted employee. Especially when there is only one trusted person responsible for all aspects of physical custody, bookkeeping, payroll, deposits, and check writing, the company is at increased risk for fraudulent activity


According to the National Federation of Independent Business there are several warning signs or tips that warrant a closer look.

*       A trusted employee refuses to follow recently established accounting guidelines.  Most guidelines are designed to protect against misstatement and a change to those new guidelines may foil or reveal past schemes.

*       A trusted employee continually works after hours, comes in frequently on weekends, or insists on taking work home.  Fraud is easier to commit when work is unobserved and unsupervised.

*       A trusted employee never takes a vacation; never releases control of records. They might be a dedicated hard-working employee or they might not want anyone to observe their work while they are away.

*       A trusted employee insists that they handle activities for which other departments are normally responsible such as picking up the mail, sole go-between with financial contacts, and working with the police when money or other assets are found missing.

*       A trusted employee continually misfiles important items such as payroll receipts, deposit records, correspondence, and estimates. Missing documents are signs of unacceptable sloppiness or a convenient inability to document transactions.

*       Deposits frequently seem too small as compared to expectations, budgets, or other records.  The owner or manager should be able to reconcile differences between expectations and actual results.


There is no goof proof method of turning up internal fraud but being on the lookout for these warning signs can help avert financial loss.


Jim W. Norman, CPA is a principal with Norman, Johnson & Co., PA, a Spartanburg Certified Public Accounting firm.  This column is intended to provide you with an informative summary of the subject matter covered.  You should consult with your tax and legal advisors for details and assistance in applying this general information to your specific situation. (


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