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Payment fraud: 7 ways to check your checks

05-29-2018

by Sherry Ziesenheim, CPA

That guy in accounting may look like a harmless numbers-cruncher, and that woman in purchasing may be a total charmer, but they are not as amiable and innocent as they seem.
Sixty-seven percent of organizations suffered actual or attempted payments fraud in 2013, and checks represented a full 82 percent of the payment formats that fraudsters target. TV sitcoms like The Office may love to depict accounting department employees as quirky but lovable, but statistics reveal that workers in accounting, purchasing, marketing and senior management are most likely to commit this type of fraud.

Before you say, “It can’t happen to us,” consider that the typical organization loses five percent of their revenues to fraud annually, and the median loss is an eye-opening $140,000. It takes an average of 18 months to discover fraud; some is never detected.

According to The Nilson Report, one-third of check fraud stems from closed accounts and check kiting; 27 percent, from counterfeit checks; 24 percent, from forgery; and 12 percent, from bankruptcy.

So how can you prevent, detect and respond to check fraud? Here are seven “checks” you should live by:

1. Hirer, Beware.

Conduct background checks on all new hires. Vigorously pre-screen all prospective employees and especially those handling cash or having financial or fiduciary responsibilities. Conduct a credit check and note in job descriptions that they are required. Check FBI databases, county and state criminal background records, and state and federal civil records.

2. “Checks” and balances

Implement strong, consistent internal controls. Separate duties. Have a second person check a cashier’s work, for example, and a third person to reconcile differences between the two. Concentrating power in one person, with no oversight or checks and balances, is a recipe for fraud. Always keep impeccable records and build in independent tests on performance.

3. Check your check policy

Who is authorized to sign checks? Who has access to the checks and are the checks adequately secured? Does management review invoices before signing checks? Are signed checks mailed ASAP? Experts advise leaders to review bank statements at least once a month and consider prohibiting writing checks payable to “Cash.” Also, consider requiring two signatures on checks above a specified threshold, and implement “Payee Positive Pay,” software which allows the bank to pay only the checks listed in your Positive Pay file. Bank officials will not honor unauthorized checks and will notify you of their existence.

4. Forewarned is forearmed

Even with these controls, theft happens. But take some comfort in knowing that strong oversight may make an employee think twice before committing a crime. Fear of getting caught is a powerful deterrent, so present the appearance –and even better, the actuality–of unforgiving oversight.

5. We’ve got you covered

Buy insurance coverage against theft. Employee dishonesty coverage will allow you to recoup financial losses suffered due to some type of employee theft. You will probably be required to present the internal controls you have in place, and the insurer may ask you to incorporate additional loss prevention techniques.

6. To catch a thief

Act with alacrity to report theft and punish offenders. Everything from a routine audit to a search warrant or subpoena can trigger an internal investigation. If an investigation is launched, immediately preserve your documents in their native format. These vital documents include paper files, emails, texts, databases, phone records and more. Keep a chain of custody log and follow the “chain” procedures, recording how the data is gathered, analyzed and preserved. And, of course, contact your insurer immediately after suspecting or uncovering fraud or theft. Review the notice of loss requirements in your policy and remember that a failure to report quickly can nullify your coverage.

7. The time after the crime

A company’s response to employee theft can include everything from termination and vigorous prosecution to a voluntary repayment agreement. These cases can get ugly and even dangerous; you may need to issue a defiant trespass letter, protect witnesses, and monitor the mental stress of the terminated employee and children.

Even though electronic transactions are dominating commerce, Pennsylvania is far from being a check-free society. To protect against check fraud, buy insurance to minimize losses, keep a firm hand on your check policies and develop strong internal controls to deter employee temptations and transgressions.

 

Sherry L. Ziesenheim, CPA, has more than 15 years of accounting experience, including business valuations and forensic investigations related to divorce proceedings, shareholder disputes and acquisitions. Contact Sherry at 717-761-7210 or sziesenheim@cpabr.com

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