Keeping Your Balance: Think fraud can’t happen to you? Think again

By Jackie Lee
Posted: 5:30 pm Thu, February 2, 2012

Do you think your organization is immune to fraud? You should think again!

According to the 2011 AFP Payments Fraud survey, during 2010, 71 percent of organizations experienced fraud or attempted fraud. The vast majority of this fraud related to checks, whether through counterfeit checks, alterations of payee or amount, or use of the information from a paper check to process ACH debits against an organization account.

Remaining diligent about fraud prevention and detection can minimize the impact of a would-be fraudster and keep your organization safe.

Business owners and board members often naively believe fraud can’t happen to them. You hear comments such as “My organization has great internal controls;” “My bookkeeper/finance director/CFO has been with me for many years, I trust them;” “I’m sure I would know if someone was stealing from me.” In reality, fraud can happen at any organization, from the smallest nonprofit with no employees to a large multi-national corporation.

The key is understanding that attempts to defraud the organization will happen, and proper procedures need to be in place to prevent any losses.

Most companies have a documented system of internal controls in place. This is a great first step in preventing and detecting fraud within an organization. However, often the best laid plans break down in reality when they are viewed as cumbersome or duplicative. Management often determines that the procedure is unnecessary and makes changes without considering all the implications. It is important to remember when making any changes to internal controls that checks and balances need to be in place. It would take a significant amount of efficiency gains from eliminating so called “duplicative” procedures when compared against the cost of fraud in the organization.

Check writing and credit cards are two very common opportunities for fraud. Checks can be stolen or simply written and cashed by unauthorized individuals. Employees with company credit cards can easily make personal purchases with the cards, leaving the company to pay the inappropriate charges.

If the same employee signing checks or authorizing payment of the credit card is also responsible for maintaining the accounting records, this provides access to falsify records and hide the fraud.

So what can you do to prevent fraud? Segregation of duties is one of the most important ways to prevent fraud. Do not allow employees access to all of the necessary areas to commit fraud and also cover it up.

• Require duplicate signatures on all checks over a certain dollar amount. The dollar amount should be low enough so a second signature is regularly needed. Consider an officer or director as the second signatory for smaller organizations, even if they are a volunteer.

• Bank reconciliations should be performed on a timely basis. With online account access available to most organizations, there is no need to wait for the bank statement to arrive monthly to reconcile your account. Reconciliations can be performed weekly or even daily, depending on the volume of transactions. One fraudulent transaction that goes undetected can lead to many more in a short period of time with today’s banking systems. In addition, bank reconciliations should be performed by individuals who are not involved in the cash receipts or disbursement process and who do not have access to the funds.

• This should go without saying, but never pre-sign checks. Only fully completed checks supported by appropriate backup documentation should be signed.

• Signature stamps should be in the possession of the signer and not accessible to anyone else, whether that is an assistant, CFO or anyone else. The same goes for blank checks.

• Someone outside the finance department should review bank statements and cancelled checks to identify any unusual items. In smaller organizations, you could have a copy of the bank statement sent directly to a board member’s home address for review.

• Credit card statements should be reviewed in detail and receipts obtained for all purchases. An individual without access to the credit card should reconcile the statement and the receipts. Any unusual or unsupported items should be reported directly to someone other than the credit card holder, for example, a board member or executive director.

• Credit card statements over a certain dollar amount should be reviewed and approved by a board member or CEO prior to payment.

• Utilize dual approvals for any wire transfers so that two individuals with separate credentials are required to process any wire transactions.

• Discuss positive pay and other electronic options for payment approval with your bank.

• Require finance employees to take regular vacations of at least a week. Many times the most trusted individuals are given access, which, when combined with a perceived need by the individual, lead to the greatest frauds.

Most importantly you must remain diligent in using the controls you have in place. Proper controls, when implemented, significantly reduce the risk of fraud having a damaging impact on your organization. If something seems unusual or odd, trust your gut and investigate the situation. You may be surprised what you find.

Jackie Lee, CPA, is a senior manager with Mengel, Metzger, Barr & Co. LLP, and can be reached at Jlee@mmb-co.com.