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Counter Fraud by Sweating the Small Stuff

January 12, 2010

On average, companies lose about 7% of revenues each year to fraud.  Throw in a full-blown recession and record low job satisfaction levels to kick off the New Year, fraud risk rises to the top of management’s radar in 2010.  Here are four surprising facts about occupational frauds.  Read the rest here:

  • Over 80% of occupational fraudsters are first-time offenders. What this means: Few people have bad intentions.  But good people do get into bad situations.
  • Most fraud activities go on for two years before they are caught.  What this means: It doesn’t happen just one time.  Once started, fraudsters have a hard stopping until external forces intervene.
  • The most popular fraud schemes have strong ties to the back-office: Billing schemes, skimming, expense report fabrication, and check tampering.  What this means: Back-office employees are most likely to see the telltale signs of fraud.  (Note that employees in the accounting department are also most likely to commit fraud, but I prefer to see the glass as half  full.)
  • The #1 way to detect a fraud is through a tip (and not through audits or other types of top-down “policing”).  What this means: Employee watchfulness is extremely effective.   Just one person’s diligence can catch a fraudster.

Bottom line:  Fraud cannot be prevented by good hiring practices, and fraudsters tend to stop only after someone catches them.  But, even small defensive actions in the back office can go a long way in minimizing fraud loss.   Here are three solid defenses that work when you apply them seriously and with intent:

  1. Prove out signatures:  Whether it’s an expense report approval or a vendor set up authorization, be certain that the signature is real and right.  A mere signature on the line is not enough.  The signer should have proper approval authority.  If the signature doesn’t look familiar, that is a red flag to investigate.  Even if the signature looks familiar, handwriting can easily be forged.  Follow up with the signer with a quick phone call or email to verify.  (Sounds cumbersome?  It can be.  That’s why more companies are digitizing the approval workflow.)
  2. Get to the Source: Reconciliations and journal entries should trace back to source documents such a schedule, invoices, the sub-ledger, system reports, third-party documents, contracts, or Board minutes.  Hint: An email message is not a source document.  An unverified Excel document is also not a source document.  The content in most spreadsheets can be, and should be, traced back to a system or third-party report (the true source) since spreadsheet figures can be easily manipulated.
  3. Divy Up Incompatible Duties: List out your duties, your system access privileges, and your approval authorizations.  As people move in and out of the organization, roles consolidate and duties reallocate.  You might be surprised at everything you can do now, and how someone else who steals or inherits your role can potentially abuse it.  Some bad combinations include: Approve and set up customers/vendors, create purchase orders and receive goods, collect/deposit monies and apply payment in the system, book journal entries to accounts and then reconcile these same accounts, print checks and then mail them.  Find incompatible duties and either get rid of them or get some oversight.

Creative Commons License
The Back Office Mechanics Blog by Nancy Wu is licensed under a Creative Commons Attribution-Share Alike 3.0 United States License.

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