Preventing & Detecting Fraud in Business Today

Preventing & Detecting Fraud in Business Today

By Todd Pleimann, CPA 

Cash is the lifeblood of many businesses. With the enormous volume of check disbursements and the technology available to the general public, it is getting harder to maintain control over checking accounts. A business can possess effective internal controls and still not catch a mistake or fraudulent disbursement until it is too late.

False security

There are many reasons businesses are susceptible to fraud. Most businesses are not aware that there is a time limit within which fraudulent checks, debits, or wire transfers clearing their accounts must be reported. It may be too late to report a discrepancy to the bank if it is not noted until the monthly reconciliation of the bank account is completed.

Also, many businesses require checks to have dual signatures as a way to prevent unauthorized disbursements. However, this is not fool proof because checks may still clear without dual signatures.

Wire transfers also present a unique risk to businesses because one person initiates the transaction. In a worst-case scenario, the person authorized to make wire transfers could completely clean out a company's bank account.

Prevention Products and Services

Additional products and services offered by banks can reduce the likelihood of fraudulent activity going undetected. Companies should discuss these products with their bank and perform a cost/benefit analysis when considering the implementation of these deterrents. Some examples include:

Positive pay systems

These relatively new systems can provide a much greater measure of cash protection. Banks will only clear checks that are matched to an electronic list of authorized disbursements submitted by the business. When items are presented for payments that are not on the list, the business is contacted.

“Blocks and filters”

These can be placed on bank accounts. When setting up blocks and filters, the company provides the bank with a list of those payees who are authorized to debit the account. The bank will decline initiated debits that are not on the payee list.

Wire Transfers

Electronic wire transfers can be set up to require one person to initiate the wire transfer and a second person to approve and release the transfer.

In-house Measures

In addition to precautionary measures offered by banks, there are other steps that business owners and senior management can perform to prevent and detect fraud. These steps include:

Receive and review the bank statement and enclosed check copies before delivery to the Accounting Department for reconciliation.

During the review, look for the following:

• Unusual wire transfers
• ACH transactions
• Cancelled checks to unknown vendors
• Miscellaneous debits

Meet with department heads on a regular basis and discuss:

• The importance of accurate financial reporting regardless of the consequences
• A zero tolerance for fraud

Ensure that there is a reconciliation of balance sheet accounts performed at least on a quarterly basis:

• All balance sheet accounts should be supported by appropriate reconciliations
• Inquiries should be made regarding large or unusual reconciling items

Periodically review listings of cash disbursement activity by vendor and look for:

• Unfamiliar names or individual names of employees         
• Excessive purchases of products or services

Periodically review payroll runs to identify:

• Employees whose names you do not recognize
• Unusually high pay rates

Review accounts receivable agings and write-offs in search of:

• Significant or unusual write offs to customers
• Significant or unusual past due accounts with customers

Review history of customer complaints noting:

• Complaints of non-posted payments       
• Failure to deliver merchandise

Perform periodic checks of expense reports submitted by employees to identify:

• Expenses claimed on dates or times an employee was not on duty
• Reimbursement claims for travel to a destination where the company does not normally conduct business
• Expense reports that show signs of alteration

Review results of inventory cycle counting:

• Look for high levels of shrinkage
• Inquire regarding reasons for significant inventory adjustments

It is important to remember that a business can never be too careful in protecting themselves against fraud. Having the right controls, supplemented by the proper tone at the top, can go a long way to prevent and deter fraud.

Todd Pleimann, CPA is the managing partner of RubinBrown LLP in Overland Park, KS.  Questions can be forwarded to him at 913-491-4144 or todd.pleimann@rubinbrown.com.