Fraud Detection and Prevention: Fraud Through Employee Reimbursements

Labor Unions

When hiring employees, you want people who will perform their work with integrity. When that integrity is compromised, an organization can suffer significant losses, like one union that lost over $100,000 in one year.

The Incident

For over 15 years, Sherry faithfully served the small labor union as their beloved bookkeeper. Now faced with her retirement, management hired her replacement: Jack. At the same time, at the advice of its consultant, management also changed the firm’s auditor. In past years, the annual audit was performed by a CPA who was an income tax practitioner. When selecting the new firm, ACME CPAs, management chose a firm and practitioners who specialized in financial audits with an emphasis in labor union/not-for-profit organizations.

With the audit underway, and as Jack evaluated the union’s process, they found that among Sherry’s responsibilities, she reviewed and approved employee expense reimbursements, processed payroll (through which employee reimbursements were processed), and managed special events. Also, to earn points on purchases for family vacations and other perks, management had allowed her to use her personal credit card without limitation. The Treasurer reviewed and approved Sherry’s expense report and looked only at the expense reports for Sherry and the other union officers.

As was usual in its audit practice, ACME CPAs designed procedures to test employee reimbursements. As they tested the support provided by Jack, they made an unexpected and shocking discovery. Sherry properly reviewed and approved employee expense reimbursements and paid them timely and accurately through payroll. Then Sherry took several of those same receipts as support for her own expense report. Determined to uncover the extent of the fraud, Jack studied all of Sherry’s expense reimbursements to find that it was a scheme that Sherry had been running for several years.

The Takeaway

Despite the size of the organization and the challenge posed by proper segregation of duties, there are several controls that can mitigate the risk of a fraud scheme like this one:

  • Engage an audit firm with expertise in auditing and your industry.
  • Trust but verify. Even in small organizations, there are ways to segregate responsibility to prevent fraud.
  • Design controls and parameters around employee reimbursements.
  • Set a budget and dig thoroughly into variances.
  • Use a credit card/employee reimbursement software with diagnostics and reports that can aid in catching fraud.

Spend a little amount of time now to protect yourself and your union against loss in the future.

Contact Us

For additional information regarding this topic, please reach out to a member of our Labor Organization Services Team.