In difficult times, there is a higher likelihood of fraud being perpetrated against businesses. When it comes to fraud, some say there are two kinds of businesses, those that have been a victim of fraud, and those that don’t know yet they have been a victim of fraud.

Fraud generally falls into three (3) categories: (1) asset misappropriation (cash and non-cash); (2) corruption schemes (bribery, conflicts of interest, etc.); and (3) fraudulent financial statements. In 70% to 80% of most cases, asset misappropriation is the usual category of the fraud.

Skimming. This is the theft of cash from a victim entity prior to its entry in an accounting system. It is an “off-book” fraud in that the missing cash is never recorded. This is difficult to detect but an internal control is to require reconciliation of money collected with cash register sales totals. We had a client discover skimming by reviewing deposit slips and noticing no cash was being deposited (only checks).

Billing Schemes. The perpetrator uses false documentation to cause a payment to be issued for a fraudulent purpose. For example, a false vendor is created by the perpetrator to claim false purchases related to cost of goods sold. In fact, the vendor is usually a real shell corporation (doing no actual business) and the payments are cashed by the perpetrator. An internal control for this is that any new vendors must be approved by the purchasing department and related to a sales invoice (or approved by an officer of the company if a vendor related to overhead).

Payroll Schemes. This is when a person who works for an organization causes that organization to issue a payment by making false claims for compensation. Most often this may be for overtime not actually worked but it can be a “ghost” employee payroll check that is cashed by the perpetrator. All overtime should be approved in writing by the appropriate supervisor. One incident was discovered when the employee claimed to come in two (2) hours early but the building alarm key code entry system showed the employee came in only one hour early.

Expense Reimbursements. Employees make false claims for reimbursement of fictitious or inflated business expenses. Expense reimbursement requests should be supported by proper receipts and be approved by the employee’s supervisor.

Check Tampering. An employee converts an entity’s funds by either fraudulently preparing a check drawn on the entity’s account for his/her own benefit or intercepting a check drawn on the entity’s account that is intended for a third party and converting that check to his/her own benefit. Certain chemicals exist that can lift the ink from a felt-tip pen from a check so the check can be re-written to different payee with a forged signature. Monthly bank statements should be received unopened by management who should then review canceled checks for unusual payees, unusual amounts, and unusual signatures.

Most fraud schemes can be prevented or deterred by a system of internal controls. Consider having an “employee dishonesty” rider on your business insurance policy (at least $25,000 coverage suggested) to cover costs if a scheme goes by undetected.

Questions or comments?
Our team can be reached at norfolk@everforecpa.com