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Internal Controls for Small Businesses - Part I: Vendor Management


As you may be aware from the news lately, “occupational fraud” (also referred to as “white collar crime”) can occur anytime and in any organization. Size does not matter. Fraud can occur in small businesses just as it can occur in the multibillion-dollar organizations.

According to the Association of Certified Fraud Examiners’ 2016 “Report to the Nations on Occupational Fraud and Abuse,” a typical organization loses five percent of its revenues in a given year as a result of fraud.

Over the next several months, I will provide recommendations on how to improve your organization’s internal controls to help identify and deter fraud. In this blog, I will provide some insights on vendors (you all have them) and how improving your controls over vendor selection and vendor account monitoring can help your efforts to deter fraud.

Fraud can be carried out by anyone inside (and outside) of your organization, from the owner or manager down to the part-time staff. The crazy thing about fraud is it can be carried out by even your most trusted employees and vendors. Why? Because a person’s decision to commit fraud is impacted by many factors, such as recent financial strains or excessive goal/performance expectations within the organization or by external competition. One way to carry out a fraud is to create fictitious vendor accounts or alter existing vendor account information.

Therefore, below are some factors to consider as you look at your vendor management process. These questions will help you think about ways you can strengthen your internal controls.

1) How often do you review your vendor master file? Do you know if there are fictitiou