In the Alfred Hitchcock classic “Dial M for Murder,” a former tennis pro contracts an old schoolmate to kill his wife. He pays the crook in cash with money methodically socked away by withdrawing just a touch more than normal over the course of a year.
The plot fails, and the husband gets caught. Among the clues that help tip off the crime is the husband’s bank ledger, which reveals the slight — but not red flag-worthy — increase in money withdrawn over time. If the investigators had not been looking for any unusual financial activity, they would never have noticed the small increased amounts.
While your employees probably aren’t plotting murder, they could be robbing your business through carefully plotted fraud, a little at a time, says Andrew T. Clark, senior manager at Meaden & Moore.
Left unchecked, he says, fraud can easily cost your business thousands of dollars a month.
“The No. 1 cause of fraud is the trust factor,” says Clark, a forensic accountant and certified fraud examiner. “In privately-held companies, you’re dealing with a small accounting department, or even just one person, handling most of the accounting functions. They may have incompatible duties, such as custody of assets, authorizing certain transactions and also record-keeping functions.
“Ownership thinks that person would never steal, and thus physical controls are overlooked. Those three duties are extremely incompatible and equal fraud risk.”
Problems occur when a fraudster has access not only to money that can be stolen but also the ability to cover his or her tracks by altering books and records and burying the money as a legitimate company expense.
“When I’m called in to investigate fraud matters, where there’s smoke, there’s usually fire,” he says. “I always look at, among other things, expense reimbursements. Typically, there will be misstatements, overstatements and wholly fictitious expenses in addition to other fraud committed by the same employee.”
Clark says there are many schemes employees use to defraud their businesses. They include:
* Fraudulent dispersements. This may be simply taking money and accounting for it elsewhere in the books, hiding the crime.
* Billing schemes. One of the most popular schemes, says Clark, is creating fictitious vendors. Fraudsters write checks to themselves or fake vendors, then convert that check for their personal benefit.
* Payroll schemes. Fraudsters have been known to create a ghost employee or, in the case of overly ambitious criminals, multiple ghost employees, and establish separate bank accounts that the fraudster controls and has the paychecks deposited into.
However, Clark warns, employees who commit fraud, in any of its forms, aren’t your typical criminals.
“Most fraudsters are first-time offenders,” he says. “But they become accustomed to the supplemental income they’ve established for themselves and rationalized the act of fraud, meaning they might believe they’re entitled to the money.”
And, if the fraudster has the ability to alter the books, he or she may be able to continue the fraud for a long time before anyone notices.
So how do you know when your company is the victim of fraud, short of suddenly finding out you’ve run out of cash? Clark offers these warning signs.
“If you identify an employee who has a brand new car in the parking lot, is taking extravagant vacations or is living a suddenly elevated lifestyle without any solid reason, those are obvious signs,” he says. “And when it comes to identifying the fraud on the books or records, review expense accounts, accounts receivable and your accounts payable.”
The most important thing you can do, he says, is to keep your eyes open and recognize that fraud can happen to any business. Even yours. How to reach: Meaden & Moore, (216) 241-3272 or www.meadenmoore.com
Protecting against fraud
Don’t look now, but your company is being robbed. And it’s not by crooks clad in hooded masks, forcing themselves upon your coffers with guns. It’s by your own employees, who are quietly — and effectively — stealing from your business.
Fraud, says Andrew T. Clark, a senior manager and forensic accountant at Meaden & Moore, can cost your company thousands of dollars each month. So what can you do to prevent, or at least deter, employees from turning into fraudsters? Clark offers a few simple preventive tips.
* Tighten internal financial controls. Review the books regularly, looking for anything out of the ordinary, such as irregular expenses paid to new vendors or patterns of exceptionally high employee expense reports.
* Segregate duties. In many middle-market companies, accounting duties are handled by a few individuals, sometimes only by one. By segregating the duties of asset custody, transaction authorization and record keeping, you will decrease the opportunities for fraudulent activity and the ability of fraudsters to cover their tracks.
* Increase companywide perception of fraud. Make your managers and staff aware that you’re trying to prevent fraud. Clark says this doesn’t mean you’ll need to install security cameras around your offices, but consider setting up an anonymous fraud hotline, voice mailbox or e-mail address where employees can pass along tips when they suspect fraud.
“Most fraud is identified by someone providing an tip to suspicious employee activity,” Clark says.
