Reduce the Likelihood of Fraud and Theft of Cash

Written on March 19, 2014

The Association of Certified Fraud Examiners (ACFE) in its Report to the Nation on Occupational Fraud & Abuse estimates that the typical business will lose an average of 7 percent of revenues from employee theft. The report also indicates that small businesses are especially vulnerable to occupational fraud since they generally have the limited resources to devote towards crime detection. The average loss suffered by businesses with fewer than 100 employees was $200,000, which was significantly higher than the average loss in any other category, including the large businesses. As a result of the recession and factors such as the credit crisis, record foreclosures in the housing market and decrease in home values, wage cuts and staff reductions,  the losses are expected to increase in the foreseeable future. Additionally, it is not uncommon for individuals who are considered a “trusted person” of an organization to take higher or extra paychecks, write checks or wire funds to him or herself, to cash, to personal creditors, to an accomplice or to a bogus company that is actually the trusted person.

Key Signs of Fraud

There are a number of warning signs to look out for related to theft of cash, such as the following:

  • Duplicate or similar payments. Repeated incidents of duplicate payments being made for the same or similar amount, to the same vendor, and/or with the same or similar date.
  • Invoices just below approval limits. Repeated invoices set at amounts that lie just below the threshold for review and approval.
  • Rounded-off billing amounts. Invoices with rounded amounts (i.e., $500, $1,000) may be a sign of fraudulent activity.
  • Unusual vendor information. This includes the absence of contact information including a phone number, multiple vendors with the same address or phone number; P.O. Box billing addresses or billing addresses that are in unusual locations; and miss-spelled  like-kind or similar-sounding vendor names.
  • Unusual invoice activity. Above average invoiced amounts, unusual number of invoices or lack thereof processed for payment, activity occurring at abnormal times such as processing of invoices for payment after business hours or on weekends.

Fraud Prevention Safeguards

There are a number of steps organizations can take in order to reduce the likelihood of theft including the following:

  • Make certain that someone independent of check processing receives unopened bank statements each month and reviews payees, amounts, signatures and endorsements.
  • Perform a second level review and approval of all prepared bank reconciliations on a monthly basis at the appropriate level (i.e., Controller, Treasurer, etc.).
  • Have someone, independent of the request for a wire transfer, verify all documentation and support for accuracy of wire transfers.
  • Ensure that the level of system access for each employee is consistent with the employee’s job function and responsibility.
  • Make certain that your cash receipts log matches the cash receipts entry in the ledger and the actual bank deposit.
  • Have a second employee involved in verifying incoming receipts.
  • Make bank deposits daily.
  • Learn how to spot “lapping receivables” where an incoming payment from a third party is misappropriated and a later payment is credited to the earlier invoice.
  • Run vendor addresses through an edit check to see if any match each other and/or employee addresses.
  • Review new vendors added in by accounting personnel periodically (weekly, monthly or as appropriate).
  • Detail review each check run for unusual payments to vendors for goods and/or services.
  • Ensure appropriate segregation of duties
    • The person who makes deposits does not also record accounting entries.
    • The person who writes checks does not also reconcile bank statements.
    • The person who approves expenses does not also sign the checks or initiate payment.

Regardless of economic conditions and trustworthiness of employees, there will always be a need for businesses to have controls in place surrounding the processing of cash transactions.  Having sound controls will go a long way in reducing the potential for misappropriation of the businesses most vital asset – cash.

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