Fraud Prevention Techniques

The last blog dealt with fraud in not-for-profits, but it is also a serious issue for business firms. Here are some cash fraud scenarios and prevention techniques that can apply to all types of organizations.

SCENARIO: One employee that is responsible for, or has access to, the handling, recording and mailing of cash disbursements creates a non-existing vendor who sends the company invoices, which are paid.

CONTROL: One employee should receive the invoice and then check that the backup documentation is correct, goods and/or services have been received and approve the payment. A different employee uninvolved in that process should pay the bill.

SCENARIO: The person that receives customer checks and who also posts it to their account diverts a few checks that come in, posts them to the correct customer account, but enters an adjustment to the customer account applying an unallocated credit amount from a different customer, and deposits the checks into a non-company account.

CONTROL: The person who receives the checks should be independent of the person who posts to the customers’ accounts.

SCENARIO: A signature stamp is given to someone in the fiscal department to write checks who starts paying his or her personal bills through the organization’s bank accounts, recording the expense to a different account each time.

CONTROL: Someone independent in the fiscal department should spot check disbursements on a monthly basis to make sure payments are proper. Often the knowledge of someone reviewing transactions can deter an employee from stealing.

SCENARIO: An employee that has disbursement access who also reconciles the bank accounts and makes journal entries creates a check to himself in the same amount which is due to a vendor, enters the payment with the vendor’s name, and deposits the check into their own bank account. Early the next month, a second check for the same payment is prepared, sent to the vendor and is also posted to the vendor’s account indicating an overpayment, which will be overlooked over time because of the ongoing nature of the time lag between an invoice being received and the payment. At some point the “overpayment” will be written off as part of an omnibus journal entry “cleaning” up the accounts.

CONTROL: An independent person should prepare bank reconciliations and have access (either paper or on line) to cancelled checks to ensure that the correct vendor is paid; the check number sequence is correct; and no manual checks were written. All journal entries should be specifically authorized by someone else in a greater authority position.

SCENARIO: An employee able to wire funds from the company’s bank accounts is the designated person to receive confirming calls from the bank makes wire transfers to pay their utilities, bank credit card bills and vendors with similar names that the organization regularly deals with.

CONTROL: The company should have the bank confirm all wire transfer transactions with an independent employee within the company to reduce the risk of improper transfers.

These are just a few illustrations of what can occur when cash is not properly monitored. The important thing to remember is that there needs to be checks and balances that are followed, monitored and communicated to your staff. The threat of being caught also serves as a deterrent. Similar situations could also be applied to other areas such as sales, purchases, inventory, payroll and equipment.

Fatema Raza, CPA, Supervisor at WithumSmith+Brown, PC and specialist in auditing systems and controls assisted in the preparation of this blog.

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