Occupational fraud is an increasing concern for many businesses. According to the Association of Certified Fraud Examiners 2008 Report to the Nation, the median loss caused by the occupational frauds in their study was $175,000.
In most cases, fraud is perpetrated by members of upper management and the accounting department. These employees tend to be highly trusted individuals. This makes sense when you consider trusted employees have been granted access to your company’s assets.
Only through diligent and ongoing effort can an organization protect itself against significant acts of fraud. Key principles for proactively establishing an environment to effectively manage an organization’s fraud risk include:
Principle 1: As part of an organization’s governance structure, a fraud risk management program should be in place, including a written policy (or policies) to convey the expectations of the board of directors and senior management regarding managing fraud risk.
Principle 2: Fraud risk exposure should be assessed periodically by the organization to identify specific potential schemes and events that the organization needs to mitigate.
Principle 3: Prevention techniques to avoid potential key fraud risk events should be established, where feasible, to mitigate possible impacts on the organization.
Principle 4: Detection techniques should be established to uncover fraud events when preventive measures fail or unmitigated risks are realized.
Principle 5: A reporting process should be in place to solicit input on potential fraud, and a coordinated approach to investigation and corrective action.
We suggest you consider implementing the following controls as a way to reduce your company’s exposure to fraud.
Conduct background checks on prospective personnel. Thoroughly check references and scrutinize all dates and time gaps in resumes. Have employees bonded if they have access to cash or work in financial functions.
Send bank and credit card statements straight to the top. The company’s owner, manager or a nonprofit audit committee member should be the first to review all bank account entries and canceled checks. Someone without authority to issue checks should reconcile bank statements and review them for forged or altered checks. Before paying credit card bills, support each charge with an original receipt.
Review documentation for all check requests. Compare original vendor invoices, purchase orders and receiving reports for agreement on quantities, brands, product descriptions and services requested. All should be stamped "paid" and marked with the related check number.
Monitor cash receipts and deposits independently of employeesrecording them. Have someone not involved in making deposits or recording accounts receivable open the mail, count money received and report totals to the owner manager or other official who compares the reported amount to the amount deposited.
Reconcile accounts receivable and accounts payable monthly. Have the owner, manager or nonprofit audit committee member review and clear all exceptions.
Check out first-time vendors. Someone independent of buying and payment processing should review all entries for new suppliers. That person should call to verify the supplier’s name, address and federal tax identification number.
Restrict authorization and access to finances. Ensure that only appropriate employees can make transactions or have access to assets, documents and records. Password protect computer files and set dollar limits on check authorization. Other safeguards include dual custody of cash receipts or cash on hand and ensuring cash and financial documents are secure.
Make employees take vacations. Especially require personnel in accounting, human resources and cash handling functions to take one or two weeks off each year, preferably at the end of an accounting cycle. Cross-train employees so that someone else can do their job and double check their work during the vacation.
Watch for red flags in employee behavior. They can include substance abuse, gambling, change in lifestyle, extramarital affairs, living beyond one’s means, possessiveness of work, high personal debts, high medical bills, peer pressures or simply dissatisfaction with work.
For additional information regarding fraud, please visit the Association of Certified Fraud Examiners website (www.acfe.com). You can access the full 2008 ACFE Report to the Nation by clicking on Fraud Resources, then Download the Report to the Nation.
Please give us a call if you have any question regarding your exposure to fraud and how you can reduce your risk.
