Twenty Ways To Prevent Fraud In Business
By Kenneth C. Gardiner, CPA, CCIFP, Partner, Dannible & McKee, LLP According to a recent study conducted by the Associa-
tion of Certified Public Fraud Examiners (“ACFE”), it is estimated that U.S. organizations lose seven (7) percent of their annual revenues to fraud. Despite increased focus on anti-fraud controls in the wake of the Sarbanes-Oxley Act and mandated consideration of fraud in financial state- ment audits, research shows that fraud in all organizations continues to increase each year. There are certain common elements of fraud preven-
tion. These elements will vary in their application de- pending on industry and the size of the entity, but they are a good starting checklist for looking at your entity’s fraud prevention system. Here are our top 20 (twenty) ways to prevent fraud in your organization:
Set the “tone at the top.” “Tone at the Top” refers to management’s attitude to- ward fraud prevention and reflects the old admonish- ment to “practice what you preach.” Education. Through education each employee becomes more aware that fraud is possible, and how it occurs; it will allow those same employees to be the frontline defense against fraud within the business.
Training. Help to safeguard the assets of the organization by hav- ing knowledgeable fraud-trained staff that can spot un- usual or “red flag” transactions.
Establish an anonymous employee hotline. Many frauds are uncovered by an employee who won’t report it for fear of job loss or retaliation in the workplace. Establish an anonymous employee hot- line through the EthicsLine (the official hotline of the ACFE).
Conduct background checks on all new hires. Proper checks can uncover criminal convictions, credit history problems, questions about education issues and integrity concerns.
Segregate duties. Separation of authorization, accounting and custody are duties that should be appropriately segregated through- out the organization.
Create a safety net. The goal of a fraud prevention system is to catch fraud- ulent activity or errors before the problem becomes
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large. Have a diligent approval process for transactions and make sure the supporting documentation approver asks questions about any/all transactions. Mandate vacations. Many times fraud is uncovered while the fraudster is away on vacation and another employee receives an un- usual call/complaint from a customer. Forcing employ- ees to take mandatory vacations will mitigate fraud.
Prevent the removal of cash prior to its entry into the accounting system. Mail should be opened by someone independent of the person responsible for initiating or posting journal en- tries. Consider a bank lock box. Reconciliation of cash received to deposits should be done daily. Always docu- ment each step in the process and place restrictions on the receivables clerk from certain tasks.
Prevent check tampering. Use positive pay banking controls. This allows a com- pany and its bank to work together to detect fraudu- lent items presented for payment. Verify that security measures are put in place for check cutting. Establish a maximum dollar amount above which the company’s bank will not accept checks drawn against the account.
Prevent billing schemes. The purchasing department should be independent of the accounting department, receiving department and shipping department. A designated official should be responsible for the approval of purchases and a differ- ent official responsible for invoice payment approval.
Prevent payroll schemes. Personnel records should be maintained independently of payroll functions. Only the personnel department should be responsible for notifying payroll of changes as it relates to compensation increases or decreases. Checks should always be signed by officers that do not prepare payroll, have access to accounting records or have custody of cash funds.
Prevent expense reimbursement schemes. A policy requiring a periodic detailed review of expense reports will help deter employees from submitting per- sonal expenses for reimbursement.
Prevent inventory theft. Someone independent of the purchasing or warehous- ing functions should conduct physical observation of
inventory. All merchandise should be physically guard- continued on page 28
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