Fraud and Basic Prevention

June 9, 2014

Per, fraud is defined as deceit, trickery, sharp practice, or breach of confidence, perpetrated for profit or to gain some unfair or dishonest advantage.   Fraud as it relates to accounting is the intentional misrepresentation or alteration of accounting records or the misappropriation of assets.  Fraud occurs when an invoice is booked in the wrong period to make the financials look better.  Fraud is writing an unauthorized check to yourself.  Fraud is charging personal expenses on a corporate card and not reimbursing the organization for them. According to the 2014 Report to the Nations on Occupational Fraud and Abuse published by the Association of Certified Fraud Examiners (ACFE), 85% of the fraud committed during their two year study was asset misappropriation with a median loss of $130,000 per case. Per the same study, the most common type of asset misappropriation was in billing at 23.3% of the cases.  The most costly type per case was check tampering with a median fraud of $120,000, this only occurred 10.9% of the time.

Now that you know what fraud is, how do you protect your organization from it?  The first thing is to ensure you have a competent staff.  Why is this important? Without employees that know what they are doing someone could easily perpetrate fraud and hide it, or coerce the staff to commit the fraud for them because they don’t know any better. You should also conduct background checks on employees who will be handling financial assets before you hire them.

Secondly, encourage strong internal controls.  Determining the controls to set in place and creating formal policies are important, but actually implementing them and checking that they work is more important.  An accounting manual is worthless if the processes aren’t followed.  Good controls involve management properly supervising and reviewing the work of staff.  Proper controls can be set up in organizations of any size. If you need help, contact your auditor. They will be able to give you tips and suggestions for strengthening your controls. A good control to have in place is a tip hotline. Per the Report to the Nations, 42.2% of cases are discovered by tip.

Lastly, you need to ensure all employees are taking vacations.  How does this help prevent fraud?  Employees who never take vacations could be conducting frauds that would be easy to uncover if someone else were to take over their duties for a short time.  An example of this would be if the employee took the funds from Customer A, and deposited them into the employee’s private account.  Now to cover this up the employee uses funds from Customer B to pay Customer A’s balance and so on and so forth.  The employee keeps doing this, and maybe they plan on paying the funds back one day but that day never materializes.  If this employee were to take a vacation and someone else were in charge of mailing out invoices and late notices, they would potential find the scheme when Customer B receives a late notice and calls to complain saying they paid it.