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In few we trust: Preventing internal fraud and theft

04-27-2018

By Scott A. Koman

Internal fraud and theft can plague businesses of all types and sizes.  Sadly, even your own brother or sister can betray your trust.

That’s what happened when a longtime Central Pennsylvania farmer passed on the farm’s day-to-day operation to his two sons, and one sibling started keeping profits rightfully earmarked for his brother.

Fraud also crept into the books of a township of about 750 residents when the secretary/treasurer regularly submitted timesheets that misrepresented the number of hours she worked.  She wound up “earning” an extra $20,000 a year in compensation. A secretary/treasurer in another Pennsylvania township stole $750,000 through payroll checks and unauthorized credit card charges.

Sometimes, the fraudster is a company’s own accountant, who can be a master at cooking the books. In one small company, the firm’s accountant stole about $118,000 over 20 months before being discovered.

At least 75 percent of business and government entities experience internal fraud, and the typical organization loses five percent of revenue to fraud each year. The median loss is $140,000 and, on average, the theft continues for 18 months before being detected.

How can businesses and governments prevent those losses? Be proactive. Implement, follow and update internal controls as needed.

Here are five tips to keep your business’ finances safe:

  1. Conduct a risk assessment.

Risks continually change. Processes that worked in the past may be passé today. A forensic accountant can test controls, identify potential issues and make recommendations.

  1. Decide which risks to mitigate.

A company cannot avoid all risks but can lessen or eliminate the effects of the most costly potential hazards. Company management will ultimately decide which risks they are willing to accept and which are worth the expense associated with mitigation.

  1. Document – and follow – your procedures.

A company may have documented procedures and controls, but if they are not followed or are outdated, they aren’t worth the paper they’re written on. It may seem like a lot of effort, but updating and enforcing policies will save plenty of grief — and money – down the road. Setting clear policies also establishes a corporate culture of accountability, spelling out expectations and consequences for new and longtime employees.

  1. Separate cash-handling duties.

Problems often arise when only one person has control over financial transactions.

A cash-handling policy should outline the process to be followed, perhaps requiring two signatures on a check or a regular management review of accounts. A forensic accountant can pinpoint the level of risk the entity faces and suggest steps to lessen or avoid fraud or theft.

How did a government employee steal more than $100,000 over three years? He was able to write checks to himself, without any oversight. Studies show that 70 percent of all check fraud occurs at companies with fewer than 100 employees, and small businesses sustain the highest median losses.

  1. Review position descriptions.

Fraud can also occur in less overt ways.  Are employees playing computer solitaire or fantasy football, shopping online or sending personal emails on company time? U.S. businesses lose $400 billion annually in productivity, an average of 4.5 hours per week for each employee, who is not “working” at work.

As part of a risk assessment, a forensic accountant will review each job description to evaluate efficiencies. Are all assigned tasks being completed? Does a staff member have too few responsibilities to justify full-time employment? With an understanding of what employees are doing during working hours, management may reallocate duties or even eliminate positions.

The bottom line…

Virtually every theft starts small. An employee who gets away with stealing from petty cash may be emboldened to try something bigger. Strong internal controls, including a risk assessment and fully documented processes, go a long way to eliminating temptations.

It is more cost-effective to prevent internal fraud and theft than to deal with its aftermath. A forensic accountant can assess risk and help to formulate a plan to avoid costly and unpleasant surprises.

Scott A. Koman, CPA, CFE and FCPA, is a senior associate at Boyer & Ritter LLC, where he is a member of the Forensic, Litigation Support and Consulting Team. Contact Scott at 717-761-7210 or skoman@cpabr.com

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