As remote work spikes along with the spread of the novel coronavirus, our experience in creating strong internal and external accounting controls is suddenly in greater demand. Business owners are already worried about the health of their workers, their families and their bottom line. They need not add fraud to that list.
Take these four steps to minimize fraud, spot poor cash management and prevent costly mistakes among newly remote staff and the essential crews still reporting to far-flung sites.
1. Know the basics
When firms look to us for fraud-prevention advice, we first share with them some basic principles.
- Avoid a false sense of security. Do you have a wonderfully designed but poorly executed internal control system? That may be the worst-case scenario, because while you think you’re safe, fraud is occurring undetected. This is the $53.7 million lesson learned, quite notoriously, by Dixon, Illinois, in 2013. Analyze your processes from top to bottom and check the work of your accounting staff.
- Aim to reduce your risk. Run away from anyone telling you they can eliminate the risk of fraud — they’re not being honest. Run toward guidance on how to discover fraud quickly and minimize risk. In two cases, our team detected an incidence of fraud in under 30 days, with almost no damage to the company.
- Control the opportunity. The fraud triangle has three factors that must be present for fraud to occur: rationalization, pressure and opportunity. Although we can rarely control how fraud is justified or the strains that lead to it, we can control the opportunity.
2. Separate duties
Next, we recommend firms take steps to keep fraud and cash-management mistakes to a minimum by tightening internal controls.
- Segregate responsibilities. Key to a solid internal control system is proper segregation — and no overlap — of duties. For instance, Sam in accounting shouldn’t be responsible for both collecting and writing off receivables.
- Review transactions. Ideally, at least two people should review a transaction before it takes place. If our fictitious Sam is the only member of accounting, implement a compensating control, such as a prompt post-transaction review process.
- Empower managers. As more staff work remotely — a trend unlikely to substantially abate post-pandemic — we recommend managers create a segregated list of duties. They can also tap personnel to oversee each duty. Be sure to check the manager’s work for improper overlap and fraud prevention at their level.
3. Set up automatic systems
Next, we advise our clients to embrace automation where possible.
- Establish a bill pay system. Bill pay systems — available through most financial institutions or online — are a remote way to segregate duties involved in paying bills. With bill pay, one individual inputs bills to be paid. Another person, such as a manager, or the owner in smaller organizations, approves the bill before payment is cleared. Any fee is offset by reducing the cost of ordering physical checks and postage. Another advantage? The ability to spot — and get an explanation for — possibly fraudulent checks going around the bill pay system.
- Institute positive pay. Ready to win the war against counterfeit checks? Positive pay is your weapon of choice. It’s an (often free) resource that’s available at almost every financial institution. We know of one construction company client that quickly realized the benefits of this system when mail theft led to a fraudster trying to cash an $11,000 check for $61,000. But for the sharp eye of a bank employee, the firm would have lost $50,000. With positive pay, such payments trigger a file that’s sent to the financial institution. This file typically contains four key pieces of information: the payee, check number, amount and date. These must match for the bank to authorize payment. Had our construction company instituted positive pay, the mismatched data would have been flagged and the fraud discovered automatically.
- Transition payments to ACH. Is your business still accepting physical checks? Consider transitioning payment collections to secure automated clearing house (ACH) systems. (If ACH is not an option, even a lockbox system can avoid overlap of duties and get payments to the bank more quickly.) Either way, each day’s deposits must be reconciled by someone other than the staff member responsible for billing or collections (or a manager or owner).
4. Examine credit and purchasing card systems
Finally, we review our clients’ credit and purchasing card usage, the most common entry point to embezzlement.
- Review expenses and authorized users. How are credit and purchasing card dollars being spent? During a time of travel limitations, a spike in hotel bills would be an obvious red flag. But other subtle purchases may slip through if statements go unexamined. Review every credit card expense for suspicious items. Also review who has — and who needs — a credit or purchase card.
- Consider switching to fleet cards. If applicable, auto fleet cards can restrict spending to gas, car washes and oil changes and cut frivolous convenience store spending. One client saw expenses drop 10% once employees could no longer add things like sandwiches and candy bars to the gas bill.
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