How much fraud do you allow in your organization?

By Dale R. Manske, CPA

Unfortunately, fraud occurs every day in many businesses and organizations throughout our communities and cities. Your business is not exempt, and it could be the target of a dishonest employee. It is the duty of management to set the tone, the procedures, and the controls to prevent fraud and discourage dishonesty. You should observe situations and opportunities in your workplace and ask, "how are we managing employee fraud in our organization"?

Many business owners, board members, directors, controllers, and managers are discovering company assets are not as well protected as they thought. This is especially true in small office environments where a single employee is in charge of the organization’s record keeping. Often, there are no "checks and balances" to verify the organization’s assets are being safeguarded.

Many organizations assume that by hiring outside Certified Public Accountants (CPA's), they are helping reduce the risk of fraud by their employees. However, most engagements performed by CPA's do not include specific procedures to detect or identify fraud or the risk of fraud. Most CPA's do work with open eyes and minds and may identify trends that detect unsophisticated employee fraud. However, once your financial records have been altered, discovering the extent of employee fraud may be difficult. Therefore, the best way to safeguard your organization’s assets is to review your internal control policies and recognize, identify, and develop internal control policies that will help mitigate employee fraud. The following are things to consider when putting your organization’s internal controls into place:

Assign related duties to different people. Certain accounting functions are designed to cross-reference each other for accuracy: writing/signing checks, ordering/paying/ receiving materials, handling cash/recording cash, etc. If separation of these duties is in place, inconsistencies will be noted sooner.

Reconcile and scrutinize your bank statements every month. A bank statement can tell you a lot about your business if you review the information in a timely manner. The business owner should receive the unopened statement to ensure the authenticity of its contents. Examine checks and endorsements, track transactions between accounts, compare payroll checks with employee records, and ask questions.

Always ask for proof before you sign a check or authorize a transaction. When you insist on reviewing original documentation, your employees become more accurate and communicate their needs more clearly. You should also verify the names of your vendors and your employees occasionally. And, remember to cancel supporting materials after signing a check.

Lock and protect your valuables. Keep blank checks and signature stamps secured, and deposit cash and checks daily. Never leave signed blank checks unattended. It’s also important to secure fidelity bonds and insurance for all accounting and key personnel.

Know your employees and examine behavior changes. Always verify employee references before hiring. 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. Require annual vacations.

Reviewing your internal control procedures can help you reveal discrepancies as well as recognize your staff’s excellent efforts. Most CPA's have the ability to assist you in reviewing and developing your internal control policies to mitigate the risk of employee fraud. Whether it be taking money, stealing inventory, or just making mistakes that are undiscovered, fraud can greatly impact your organization’s management decisions, financial reports, and tax filings. But, with proper internal control procedures in place, it may be much more difficult for employees to manipulate the internal control system to commit fraud.

Dale R. Manske, CPA is the Manager of the Accounting and Auditing Department of Echelbarger, Himebaugh, Tamm & Co., P.C. (EHTC) serving closely-held businesses. Dale can provide a checklist to help you recognize warning signs and prevent problem situations from arising. He can be reached at 616.575.3482 or dalem@ehtc.com.