Are Banks Unwittingly Facilitating Small Business Fraud?

David Anderson is principal of David Anderson & Associates, a Philadelphia forensic accounting firm that provides a full range of fraud investigation, fraud deterrence, litigation support and expert witness testimony services in Philadelphia and the Delaware Valley. 

Several frauds that I recently investigated have been strikingly similar.  In each case, a trusted employee misappropriated funds by writing checks either to themselves or an associate. Management was unaware of the fraud largely because their bank had stopped providing paid, cancelled checks or copies.  When each fraud was finally discovered, the losses were significant because of the long duration of each employee’s scheme.

As mentioned in recent blogs, a trusted employee is one who – by virtue of such factors as longevity with the company, past demonstrations of loyalty and/or hard work, and social and/or familial relationships with management – has earned a level of trust and faces less oversight than other employees.  Add to this the fact that many small businesses are unable to install the internal controls related to separation of duties – primarily because they lack enough knowledgeable and experienced employees to allow for separation of incompatible duties – and you can end up with an employee who can write checks, enter the paid check information into the company’s accounting system, and sometimes even perform bank account reconciliations.  Because the employee is trusted, management is less likely to closely monitor the employee’s activities.  These kinds of situations could lead to the trusted employee misappropriating funds which, because of the reduced likelihood of detection, could result in significant losses.

In the past, I recommended the owner or CEO (not the Controller or CFO because of the separation of duties and oversight issues) have the bank send the monthly bank statements directly to him/her so that he/she can review the paid checks (or copies) to identify any unusual payees (either in name, frequency of payment, or in amounts paid).  Beginning about ten years ago, many banks stopped returning the paid, cancelled checks with the bank statements as a means of reducing operating costs.  Instead, they provided reduced size copies of the front of each paid, cancelled check.

However, in the last few years, many banks also have stopped providing these check copies.  Instead, the banks give companies the means to access a copy of each paid check online.  Accessing each paid check online can be quite time consuming, especially when a company issues hundreds of checks each month.  As a result, it has become impractical for the owner or CEO to conduct this review.  In one instance of fraudulent activity by a trusted employee, the owner turned to his trusted employee to conduct the review, unaware that the trusted employee was the one writing the improper checks.

Given that banks have not been providing paid, cancelled checks or copies, here is a new set of recommendations I’m suggesting to the small business owner:

  • Arrange to pay the bank to provide either paid, cancelled checks or copies (the fee will be much less than the potential fraud loss) so that the owner can review them; or
  • If your bank won’t provide such, consider changing banks to one that will provide either paid, cancelled checks or copies; or
  • Engage a reliable outside person, such as a forensic accountant, to regularly review paid checks online.

Additionally, I recommend the small business owner:

  • Establish a company policy, in writing, that fraud is wrong and will not be tolerated by the company. Additionally, the small business owner should have each employee read the policy statement, and sign an acknowledgement that he/she has read and understood the company policy.
  • Let employees know that management is watching, and has instituted fraud prevention measures (without going into detail regarding the specifics of the measures).
  • Hold periodic training sessions on spotting and reporting fraud.
  • Inform employees management will be conducting surprise audits of bank accounts (again, without going into detail regarding the specifics of when and how the surprise audits will be conducted).
  • Consider having a reliable outside person, such as a forensic accountant, perform bank account reconciliations.

The cost of implementing such measures will be much less than the potential fraud faced by not implementing them.  By instituting the above-mentioned anti-fraud controls, small businesses can significantly reduce the likelihood that the cessation of banks providing paid, cancelled checks or copies will facilitate fraud by trusted employees.

If you require the services of an experienced forensic accountant in Philadelphia and the Delaware Valley, please contact the Philadelphia forensic accounting firm of David Anderson & Associates by calling David Anderson at 267-207-3597 or emailing him at

About David Anderson & Associates

David Anderson & Associates is a Philadelphia forensic accounting firm that provides a full range of forensic accounting services in Philadelphia and the Delaware Valley.  The experienced professionals at David Anderson & Associates provide forensic accounting, business valuation, fraud investigation, litigation support, economic damage analysis, business consulting and outsourced CFO services.  Company principal David Anderson has more than 30 years of experience in financial and operational leadership positions and is a Certified Public Accountant, a Certified Fraud Examiner and a Certified Valuation Analyst.