Detecting Internal Fraud
By
Many business owners feel
that fraud and embezzlement are problems that happen to those big
businesses. Not so, is the conclusion
of the 2002 Report to the Nation on Occupational Fraud and Abuse issued by the
Association of Certified Fraud Examiners.
Their study shows that small
businesses are the most vulnerable to fraud and abuse with asset
misappropriation accounting for 80% of the losses. The favorite asset? Cash. It makes up 47% of
assets misappropriated with inventory and supplies making up another 38%.
Much of this activity is due
to occupational or internal fraud. Quite often internal fraud is easier to
prevent than to detect. Most schemes can
be prevented with basic accounting controls, audits, and proper oversight. Of course physical protection and custody of
assets such as cash, inventory, and supplies are important, but often the fraud
is perpetrated by those charged with that oversight a manager, the in-house
accountant or bookkeeper, or any trusted employee. Especially when there is
only one trusted person responsible for all aspects of physical custody,
bookkeeping, payroll, deposits, and check writing, the company is at increased
risk for fraudulent activity
According to the National
Federation of Independent Business there are several warning signs or tips that
warrant a closer look.
A trusted employee
refuses to follow recently established accounting guidelines. Most guidelines are designed to protect
against misstatement and a change to those new guidelines may foil or reveal
past schemes.
A trusted
employee continually works after hours, comes in frequently on weekends, or
insists on taking work home. Fraud is
easier to commit when work is unobserved and unsupervised.
A trusted
employee never takes a vacation; never releases control of records. They might
be a dedicated hard-working employee or they might not want anyone to observe
their work while they are away.
A trusted
employee insists that they handle activities for which other departments are
normally responsible such as picking up the mail, sole go-between with
financial contacts, and working with the police when money or other assets are
found missing.
A trusted
employee continually misfiles important items such as payroll receipts, deposit
records, correspondence, and estimates. Missing documents are signs of
unacceptable sloppiness or a convenient inability to document transactions.
Deposits
frequently seem too small as compared to expectations, budgets, or other
records. The owner or manager should be
able to reconcile differences between expectations and actual results.
There is no goof proof method
of turning up internal fraud but being on the lookout for these warning signs
can help avert financial loss.
Click here to return to referring page or here to return to the home page.