The economic conditions of late have, unfortunately, set the stage for fraudulent activity. But fraud doesn’t happen in an instant. Those who steal from their businesses often plan extensively and take little bits of money at a time. Fortunately for management, this means that if you’re watching carefully, you can spot warning signs and take the action necessary to prevent major losses.
To help you do so, we’re sharing 4 scenarios in which fraud tends to occur, the warning signs of each specific activity, and tips to prevent all from occurring.
1. A company manager steals a large sum over several years. He does so sneakily by paying for personal expenses with company funds.
• “How does he afford that?!” Catch yourself saying this and take note. The most common sign of fraud is an individual living above his or her means.
• The manager has become a control freak. He monopolizes the accounting department and takes on the role of watchdog over other employees.
• Reluctance to take time off. If the manager isn’t in the office, he can’t control who sees what, therefore his fraudulent behavior may come to light.
• Make sure the person who pays the credit card bill is not also the person who reviews it.
• Look into all unusual charges.
2. An employee in charge of handing cash steals a significant sum over a number of years by only depositing a portion of incoming funds and pocketing the rest. She covers her tracks by altering the bank statement to agree with the accounting records and destroying the original.
• Employee is unwilling to share duties.
• Employee refuses to take vacations (and who doesn’t like vacations?).
• Divide financial duties among employees or use outsourced accountants.
• Make sure the bank statement is reconciled by someone other than the employee in charge of depositing cash.
3. A company owner charges work done for him personally (say maintenance on his automobile) to the company. He does so by doctoring his personal invoices to show that work was done for or at the company (say on a company car, not his own) and submitting them to the accounts payable department at his company.
• This owner, also, is leaving beyond his means. “Wow, new car?” “Another addition to the house?!”
• The owner is defensive.
• The owner is under pressure to succeed, to have something to show for his efforts.
• Match invoices with purchase orders.
• Designate an employee to approve invoices.
• Maintain original copies of invoices.
4. A payroll employee works with another staff member to commit fraud. She continually overpays her fellow employee, resulting in major losses over time.
• Payroll employee is unwilling to share duties (or unable to, being the only member of the payroll staff).
• Have more than one employee running payroll and segregate duties within it. (Or utilize a CFO service professional)
• Require a separate manager to review payroll reports.
A common thread runs throughout these scenarios: the fraudulent employee is acting abnormally. Suspicious behavior is often not difficult to spot, but it is difficult to write off as meaningless. Resist the temptation to do so and take preventative measures to prevent fraud at first warning signs.
For those start-up businesses looking to implement an accounting function that will ward off fraud, contact our start-up accounting and CFO services experts and visit Baker Tilly’s Top tips for recognizing fraud when you need a refresher on recognizing and preventing fraud.