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Train your employees to be fraud fighters

Fraud can devastate any business, but small-business owners are especially vulnerable to the costs of financial betrayal by trusted employees. Companies with small staffs often ask their workers to wear many hats, which results in a lack of internal controls and a loss of the natural checks and balances that occur in a large department.

Small-business owners must be able to identify the red flags of fraud so they can stop the theft quickly or prevent it altogether. The owner’s knowledge, however, is not enough; all small-business employees must be trained to spot the warning signs for fraudulent behavior and report them. They should also know how to report fraud once a red flag is detected.

A little foreknowledge can go a long way. If employees know in advance what fraud-fighting policies would be enforced, imagine how that will change their behavior or their perception of what could be hidden from management. For example, announcing that random audits and inspections would occur, or that vacation time is mandatory for all employees, might help combat some of the temptation to commit fraud.

The most recent Global Fraud Study by the Association of Certified Fraud Examiners shows one fraud red flag was identified in 92 percent of the occupational fraud cases they studied, and two or more behavior red flags were identified in 64 percent of cases. If these red flags can be identified early in the fraud scheme, the damages can be reduced.

The association identified the following as the top five behavioral red flags typically displayed by fraudsters:

1. Living beyond one’s means – The employee buys expensive jewelry, takes extravagant vacations or purchases new vehicles that are out of the employees’ salary range.

2. Financial difficulties – The employee purchases everything on credit, the office receives calls from banks requesting payments taken out of paychecks, or collectors call during business hours looking for the employee at work.

3. Unusually close association with vendors/customers – If employees are often seen associating with vendors or customers outside of work, re-examine these relationships. Common fraud schemes involve payments to vendors who are friends.

4. Control issues, unwillingness to share duties – Sometimes an employee does not delegate duties to others and is unwilling to take vacations, which would require another employee to see his work.

5. “Wheeler-dealer” attitude – Shrewd or unscrupulous behavior in employees can be a sign of people willing to bend rules to suit their needs.

Once employees are trained to spot these five red flags, the next step is for them to act. Employers should give employees a way to report fraud concerns, perhaps through an anonymous hotline or a secure comment box. If employees identify any of these red flags, they should report them immediately.

On average, fraud cases cost businesses $8,500 a month and go on for 18 months before they are uncovered. A group of vigilant employees could shorten the time a fraudster is allowed to go unchecked, saving the business thousands of dollars for each month the fraud is cut short.

A recent example of employee misappropriation includes an investigation performed by our firm that was based on a tip given to a local business owner. The suspected employee had been with the company for many years as a bookkeeper in the office. Duties included maintaining company accounts in QuickBooks, which involved handling accounts payable, payroll, recording daily deposits and reconciling the accounts monthly. The suspect wasn’t an authorized signer on the checking account but had access to the signature stamp. Apparently, the opportunity to use the stamp proved too great for the suspect.

Our investigation uncovered several schemes, which primarily included issuing checks in the perpetrator’s name or to cash and changing the payee in QuickBooks to that of a customary vendor. When interviewed and confronted with selected examples unearthed by our forensic accounting procedures, the perpetrator admitted to the schemes and to having a gambling problem.

Some behavioral red flags that should have raised suspicion included the purchase of a new vehicle, bank statements with missing check copies and the suspect working on bank statements off premises.

Business owners can look to this real-life example for two fraud-prevention steps:

▶ Segregate duties. The reconciliation of accounts, review of bank statements and inspection of paid checks should be performed by someone who isn’t responsible for both check writing and having full accessibility to the accounting system. This bookkeeper was given both the lock and the key — he could write a check, post it to the accounting system as a seemingly valid vendor and perform bank account reconciliations to ensure that everything balanced.

▶ Lock away the signature stamp. Only the authorized user of the stamp should have access — this stamp should be guarded as closely as cash, since ultimately it can be used to drain cash from a business’s accounts.

Consider these examples as motivation to train your employees to be an army of fraud fighters. If everyone knows about the internal fraud-prevention procedures and the five red flags the average fraudster displays, they can help business owners stop fraud before it causes irreparable financial harm. If a business owner receives a tip, it should be acted on immediately. A fraud examiner can be brought in to analyze financial documents to uncover the fraud, interview the suspected fraudster and calculate the damages.

Mike Rosten is a CPA and principal at Piercy Bowler Taylor &Kern CPAs and Business Advisors in Las Vegas. Reach him at mrosten@pbtk.com or 702-384-1120.

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