Monday, January 27, 2014

Simple ways to protect your business from fraud

The client call I recently received sounded familiar. On the phone, a distraught business owner described what he had found: “I caught her writing checks to herself; one for $5,000! She has worked here for years and is the best employee we have.” I expressed my regrets about what he was experiencing and asked several clarifying questions. In all seriousness, he asked me, “Do you know her?”
No, I didn’t know the fraudster who took $550,000 from him, but I definitely know her type. The most heartbreaking part of my job is the realization that most fraud schemes are easily detectable. No matter the amount of loss or the type of scheme, there are common denominators that business owners can learn from.
Fraudsters are typically well-liked by owners/management.
Would you give the keys to your kingdom (i.e. access to your money) to someone you didn’t like? Fraud occurs when someone is experiencing an internal pressure (e.g. debt, unemployed spouse, family crisis), can rationalize their behavior (“I am worth more.” “I will pay it back next time.”) and has opportunity to commit the act. This can occur when someone has access to the money and knows they are trusted in their job. Fraudsters are affable and have an answer to everything. They know you’ll believe them and they don’t have to show “proof” when you ask a question.
Ask questions and demand backup documentation, even if you know the answers. Employees are less likely to perpetrate a crime if they know there is oversight over their work. Trust is not an internal control.
Reviewing monthly bank statements and cancelled checks will uncover the majority of all frauds.
Well over 50 percent of all frauds are attributable to fraudulent disbursement schemes. Overpaid payroll, fictitious expense reimbursements, and check tampering schemes are so common that it’s often the first place I look.
Review your bank statement every month. Are there any electronic payments that look odd to you? Ensure your bank returns cancelled check images. Are there payments going to any individuals or vendors that are out of place? What about payments to credit cards, utilities or other common vendors used by businesses and individuals? Are there two per month, indicating that someone is paying your bills in addition to their own? This review should be performed by someone other than the person in charge of accounts payable.
Incoming cash and checks are easy to steal.
Incoming cash and checks are easy pickings for fraudsters who think they need your money. Yes, you read that correctly, incoming checks written to you are easily converted to benefit the fraudster – just ask my recent client who lost over $250,000 from a similar scheme!
Internal controls over cash receipts should include a receipt method for all monies received. Those receipts should be sequenced and reconciled to the amount of cash and checks deposited to the bank. Checks should be endorsed the moment received and all funds should be taken to the bank daily. Review your accounting records to ensure no unauthorized credits or write-offs have been posted to customer accounts, which would indicate money has been skimmed.
Most frauds exceed six figures and have occurred for 18 months by the time they are uncovered. Being a business owner myself, I know how busy you are. I also know how you love running your business and bookkeeping is a chore (yes, even this accountant thinks so!). Internal controls and proper oversight do not have to be cumbersome, involve multiple people, or cost more. Keep it simple and effective and save yourself the heartache of learning that your best employee has actually been your worst one.
This piece originally appeared as an Accounting & Finance column in the January 24, 2014 edition of the Vancouver Business Journal.

Thursday, January 2, 2014

The Fraud Triangle

People often ask about the "basics" of internal fraud. Why it happens and what can be done to prevent it. The easiest way to show this is the Fraud Triangle....

What is Fraud?
Occupational fraud is the use of one's occupation for unauthorized personal gain through deliberate misuse of the employing entity's resources or assets. The Association of Certified Fraud Examiners (ACFE) estimates that typical organizations lose 5% of their annual revenues to fraud (2012 ACFE Report to the Nations on Occupational Fraud & Abuse).


Common Pressures:
High Personal Debt
Gambling or Drug Addictions
Personal Crisis
Overworked (fewer people doing more work)


Common Rationalizations:
I will pay it back when my next paycheck comes in
Everyone else is doing it
I am underpaid and over worked
Just this once...

It's important to note that pressure and rationalization are most often “internal” motivators that are beyond an employer's control. However, the one variable in the fraud triangle that is within the control of owners and management is OPPORTUNITY. Limiting an employee's opportunity through a strong tone at the top, proper internal controls, and oversight can limit losses due to occupational fraud.

How Does Fraud Occur?
Occupational fraud predominantly occurs as:


Asset Misappropriation:
Comprises over 87% of all cases reported
Theft of Cash
Fraudulent Disbursements
Payroll Schemes
Expense Reimbursement Schemes


Approximately 33% of all cases reported had elements of corruption schemes


Fraudulent Financial Statements:
Nearly 8% of all cases reported were financial statement fraud schemes
Earnings management
Concealed liabilities
Timing differences
Improper disclosures

How Can Businesses Minimize the Risk of Fraud?
Make your vigilance against fraud front and center. Fraud should be discussed openly and your employees should all be trained on what to look for and pitfalls to avoid. Owners and management are responsible for setting a tone of acceptable behavior. Additionally, an anonymous tip line to report fraudulent activity is always a good idea.

Internal Controls Best Practices:
  • Have bank statements AND cancelled checks mailed to the business owners home. Review the bank statement for unauthorized withdrawals; review the front and back of each check to ensure they represent authorized business payments.
  • Segregate duties and make sure they stay segregated, even in periods of downsizing.
  • Perform unexpected "audits" on payments - demand backup documentation and reviews throughout the year.
  • Cash business? Verify cash is listed on the top of bank deposit slips and that deposit slip totals match bank statement totals.
  • Perform annual reviews of vendors and service providers to ensure they are legitimate.

What Should be Done When Fraud is Suspected? 
If you suspect fraud or have received information that alleges fraud has occurred, contact legal counsel for your company, notify the local authorities, and review your insurance policy to fully understand the benefits of your coverage. You may not realize it, but your insurance may cover a portion of the loss and in some cases, the cost to investigate the loss event and establish the loss amount.

Next, contact us! We can perform an independent investigation, quantify the loss, and professionally document the event. We will work with you (or your clients) to be a seamless member of your team.