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The Secrets of Fraud Prevention

Aug 01, 2018

Desperate times drive people to take desperate measures. Even valued, long-time employees who have earned the trust of management can commit embezzlement because of financial or family situations. Fraud can put a smaller company out of business, so recognizing how it typically happens and what you can do to mitigate the impact should be big priorities for your organization.

The truth is that preventing 100% of fraud is impossible — and the first step to preventing fraud in your business is understanding that. What will be most helpful to you is knowing how to minimize the risk of fraud as well as treating it as an ongoing process.

Common Types of Fraud

The majority of fraud involves cash, whether it is misdirection of money or outright theft, or embezzlement from inside or outside the company. One example of internal fraud is an employee who writes a check using QuickBooks, voids the check, but then turns off the audit trail and rewrites the check to something they control, causing the books to show the wrong name. In another example, an accounts receivable clerk can receive a first-time customer’s payment, steal the money and tell superiors that the customer never paid the debt. Even worse, the clerk could tell superiors they should refuse to do business with that customer again.

A typical example of outside fraud is someone sending in fake invoices for companies that don’t exist and for work that was never performed, which might surprise you in its effectiveness.

How to Minimize the Risk of Fraud

Fraud prevention works best with continued diligence in maintaining proper internal controls. The appropriate segregation of duties is one crucial way to help prevent fraud. The employee who takes care of collections should not have the ability to make an adjustment to write off receivables. And certainly, the employee who prepares and signs the checks should not be preparing the bank reconciliation.

Another way to prevent fraud is to monitor production. If an employee needs to produce a certain number of invoices in a certain amount of time, and they know their production is being kept track of, they’re more likely to produce that number and less likely to believe they can get away with introducing some type of fraud into the mix. When monitoring production, make sure you’re paying close attention to quality as well as quantity.

Assessing Your Business’s Risk

Obviously, every company’s internal setup is different, and sometimes there’s a shortage of staff to ensure proper segregation of duties. With these variables in mind, what is the best way to approach risk management in your business?

The majority of time, the only asset at risk is cash, and for every business, there are a limited number of ways cash can come into or leave the company. This is where outside help can be very effective. Wipfli’s specialized, experienced consultants can perform a fraud risk assessment, where we look at your processes and controls to determine where you’re at risk for fraud, and how you can modify those processes and controls to minimize risk.

Remember that you need to be able to continually adapt your internal controls and plans. Because many employees look for ways to streamline their jobs, and these changes can circumvent your internal controls, you should also consider where your internal controls can be simplified. We can assist with this process as well.

Contact us to learn more about Wipfli’s fraud risk assessment and how it can help your business minimize the risk of fraud.


David G. Friedman, CPA, CFE, CFF, CICA
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