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Fraud Avoidance

How insulated is your company from potential fraud? Here are just a few true stories to make you begin to question your companies policies. No names will be used to protect our client’s confidentiality.

Fraud Situation #1 – A small marketer was getting ready to retire. Unfortunately, this two children had not worked out very well in the business and had absolutely no interest in coming in and running the company upon his retirement. Therefore, this marketer began seriously considering giving a portion of his company to his most senior, trusted employee. In this small family-run operation, the gal had become like a daughter to the owner over the years.

Next comes an IRS excise tax audit. Much to his shock, via the audit, the marketer finds his trusted employee, who was about to be given a portion of the company, had been stealing at least $60K per year from taxes!

Fraud Situation #2 – A marketer quickly expands his formerly wholesale-only business into retail. A year goes by and the certain stores appear to have lower profits than they should. No one seemed to be able to figure out what was happening until a cash audit was taken. It was discovered that the manager was helping himself to the cash safe, about $2K per month, and covering it up in the store paperwork!

Fraud Situation #3 – A wholesale marketer was expanding rapidly, including spending lots of money on new tanks and equipment. One day, both the CFO and bookkeeper were out sick when a vendor called looking for payment. When another office worker tried to research the requested payment, irregularities were noticed and research began.

In this case, the CFO was using the company’s regular equipment vendors (and funds) to build new facilities at his personal residence. No one is sure how much went into his personal slush fund, but the owner estimated as much as $750K over two to three years time.

Fraud Situation #4 – An age twentyish young lady recently told of her “training” at an aunt and uncle’s c-store about how to take cash under the table so that the aunt and uncle wouldn’t have to pay as much income tax. She received her instruction on how to steal from the government at age 10! Her same techniques could have been easily applied elsewhere if she had stayed in the retail industry after she grew up.

To prevent your company from being the next victim of fraud, you must actively take steps to protect yourself. Use these anti-fraud procedures no matter how trustworthy your employees may seem to be.

1) Verify all cash handling by at least two persons.   Cash handling takes a multitude of forms including fuel drivers picking up cash on COD customers, store level cash in registers and safes, cash deposits, and walk-in wholesale cash customers. Have double control of each cash transaction.

2) Avoid collusion. The two persons involved in any cash transaction should not be related and ideally, should come from separate departments. In our case #3, the CFO and bookkeeper were a husband and wife team. Bad idea!

3) All vendor payments over a certain dollar amount (usually $500) should require an additional signature for payment. If the payables clerk is the only one signing checks, there is no double-check on the payments.

4) All major deliveries should require company signature. Watch for situations where an employee can get into collusion with a vendor and be taking a portion of the delivery home. Ideally, a two signature system is helpful but not always practical.

5) Verify vendor deliveries by actual count of the incoming product. It’s easy for vendors to short pack a case, or play switch games when they are on your location.

5) Whenever possible, do not allow vendors to actually stock product. If you must allow this, at least require vendor check-in and check-out.

6) At the retail level, include cashier fraud monitoring in mystery shopping. This includes watching for no-rings and under-rings.   Most cashiers will leave tell-tale signs of their wrong-doings close by the register to keep track of their “take.” Watch for pennies, matchbooks, cough drops or anything else that could be used for counting.

Whenever possible, do not use “shared drawers” on a shift. Have one cashier per drawer so they are ultimately responsible for the cash contents throughout the shift. Additionally, at the end of a shift, there should be supervision over a cashier at the point they remove their drawer from the register. That same supervisor should stay with them all the way through the final paperwork so they don’t have an opportunity to take any pilfered cash out of the drawer during the close-out procedure.

7) The person who reconciles the monthly bank account statements should be different than anyone using or signing on the account. In a small company, often the financial person does everything which is what happened in situation #1. Even if an owner must reconcile the books, keep the integrity of the independent reconciliation.

8) Be alert to employee financial stress. When you know an employee is having trouble making ends meet, be alert for potential theft.   Convicted thieves often talk about starting small when times were lean for them.

9) Be alert to employee lottery activity and gaming. Research shows a direct link between lottery play frequency and employee theft. Heavy lottery play is often a desperation maneuver for sorely needed additional funds.

10) Include every individual and department in fraud prevention measures. Remember it’s usually its the people we least suspect that end up stealing from us. Don’t play favorites when it comes to fraud policies.

11) Engage your outside CPA firm for help with fraud prevention procedures. Most CPA’s are well-aware of common safeguards to prevent fraud. Inquire about an audit of your present policies and procedures to locate your current vulnerabilities and put new procedures in place.

Finally, remember that an ounce of prevention is worth a pound of cure. It will be much less expensive to institute effective fraud prevention policies now, before you need them, than after you uncover a problem!

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