by Peggy Van Zanten

As the company’s longtime accounts payable manager, Jane M. Bezzler was considered the “backbone” of Specialty Manufacturing. Extremely dedicated, she worked early, late, and on weekends, and she rarely took vacations. Everyone relied on Jane as the company’s go-to person.

Even Specialty Manufacturing’s owner, Jim Dawson, confessed that he couldn’t run the company without her. He trusted her completely.

That is, until Jim discovered that Jane had taken advantage of his trust by stealing from his company. She regularly wrote checks to companies that did not exist to pay for supplies or services that had never been purchased. The bank accounts for these nonexistent companies were controlled by Jane. Over the course of her 20 years, “trusted” Jane had stolen almost $500,000.

From fiction to fact

While the above example is fictitious, the risk is not. According to the 2006 Association of Certified Fraud Examiners’ (ACFE) Report to the Nation on Occupational Fraud and Abuse, occupational fraud imposes enormous costs on organizations. In fact, 87.7% of all asset misappropriations are cash, as opposed to noncash assets, such as inventory or proprietary information.

In manufacturing, the most frequent types of asset misappropriation are billing schemes. These are defined by ACFE as “any scheme in which a person causes his or her employer to issue a payment by submitting invoices for fictitious goods or services, inflated invoices, or invoices for personal purchases.”

Safeguard your organization through segregation of duties

Strong anti-fraud measures can help limit your losses. Chief among them is the need to segregate accounts payable duties.

By segregating duties, more than one individual is involved in the initiation, processing, recording, and reviewing of every transaction, and you prevent a single employee from controlling any transaction from beginning to end.

Dividing the responsibilities between employees will ensure better checks and balances. After all, stealing alone is one thing, but having to enlist the help of a coworker can greatly reduce the opportunity.

Here are five measures that can reinforce a successful segregation of duties:

1. Prevent the accounts payable clerk from adding new vendors to the vendor master file. Although the clerk is allowed to view the master file, he or she should not be permitted to add, delete, or edit the file. It’s also a good idea to periodically purge old vendors from your vendor list. Vendors with whom you no longer conduct business can offer an employee the same fraud opportunities as does the ability to establish a new vendor.
   
   
2. Assign a different employee to maintain custody of the blank check inventory and issue checks to preparers as needed. The accounts payable clerk should not have uncontrolled access to the prenumbered, blank check stock. Some older accounts payable check-writing programs use blank check stock that must be aligned in the printer prior to actually printing the checks. The alignment check stock needs to be accounted for and voided to prevent use of these checks for unauthorized purposes.
   
   
3. Prohibit the accounts payable clerk from being an authorized signer on the bank account. The clerk should not sign checks and should not have access to signature stamps.
   
   
4. Once checks are signed, avoid returning them to the accounts payable clerk. An employee with no accounts payable duties should put the checks into envelopes and mail them.
   
   
5. Avoid giving the accounts payable clerk the responsibility of preparing the bank reconciliation. Additionally, the bank reconciliation should be reviewed by someone other than the preparer. Procedures should include verification of the reconciling items, review of the check number sequence, comparison of the listed bank balance to the bank statement, and agreement of the reconciled balance to the balance of the general ledger cash account.

Remember, even simple ideas can have a big impact on fraud prevention and in increasing the likelihood of early detection, keeping you from becoming a half-a-million-dollar victim of a 20-year fraud scheme!

About the Author

Peggy Van Zanten, CPA, CMA, MBA, CFE, brings the experience of working in the public and private arena to each client. This background helps her to understand her clients, provide insight and identify issues. To learn more about Wipfli's fraud services, please contact Peggy at pvanzanten@wipfli.com.