Fraud Increases During Recessions

By Dale R. Manske, CPA

Many business owners are discovering a recession can create an increase in fraudulent behavior and their business assets are not as well protected as they thought. Financial pressures experienced by individuals and families during the current economic crisis have led to an increase in all types of fraud. Layoffs and downsizing are causing breaches in organizations’ internal control systems. This is especially true in small business environments when a single employee remains to manage all company financials. Often there are no "checks and balances" to verify accurate and honest transactions.

Understanding the pressures on your employees is crucial to effective fraud prevention. Financial need is the most prevalent incentive for fraudulent behavior. Rationalization or a sense of entitlement, and a perceived opportunity to “get away with it” are also contributing factors. The lack of proper, consistent procedures and controls enable employees to manipulate the system for their benefit. Whether an employee embezzles money or removes product or inventory, the result can greatly affect a company’s financial reports, tax filings, and decisions.

Unfortunately, once the financial records have been altered, discovering problems may be very difficult. Most standard accounting practices are not designed to uncover internal problems such as embezzlement. Therefore, the best way to safeguard company assets is to recognize and improve weaknesses in internal procedures. Echelbarger, Himebaugh, Tamm & Co., (EHTC) recommends the following business practices to help minimize potential internal control problems:

• Related duties should be assigned to different staff members: Certain accounting functions are designed to cross-reference each other for accuracy. The following duties should not be assigned to a single individual: writing/signing checks, ordering/paying/receiving materials, handling cash/recording cash, etc. Inconsistencies in records can be spotted in a timely manner if checks and balances are in place.
   
• Reconcile and scrutinize bank statements every month: Management should review each bank statement in a timely manner. Examine checks and endorsements, track transactions between accounts, compare payroll checks with employee records, and ask questions.
   
• Always ask for proof before signing a check or authorizing a transaction: Mandating original documentation for substantiation requires employees to be accurate and communicate needs more clearly. Verify vendor names and employees occasionally. Cancel supporting documents after approving a disbursement to eliminate duplicate payments.
   
• Lock and protect valuables: Keep blank checks secured, deposit cash and checks daily, control a signature stamp if one is utilized. A better procedure is to personally sign checks rather than using a signature stamp. It is also important to secure fidelity bonds and insurance for all accounting and key personnel.
   
• Know employees and recognize behavior changes: Always verify employee references before hiring. Consider the need for conducting other background checks as appropriate, including but not limited to the need for credit information, a motor vehicle report, and criminal searches. Many white-collar crimes go unreported and continue to be repeated. Watch for trouble signs: possible substance abuse, change in lifestyle, living beyond means, possessiveness of work.

These internal controls can help reveal discrepancies, as well as recognize the excellent efforts of your staff. EHTC can help develop and implement these important internal controls. Take a look at our brochure: Recognizing Fraud Warning Signs and Preventing Problem Situations, for more information regarding Fraud Prevention and a valuable a checklist containing questions to consider when structuring an organization's internal controls. For more information on how fraud can affect an organization, download a copy of the Association of Certified Fraud Examiners’ 2008 Report to the Nation on Occupational Fraud and Abuse from EHTC’s website.