How can behavioral profiling help identify fraud?
Profiling is very helpful in that if you see someone’s behavior dramatically change, or if their lifestyle does not match their apparent income, you should question why. If you have someone making $30,000 a year and they’re driving a Ferrari, there is a mismatch between income and lifestyle. There may be a very good reason why he’s driving a Ferrari, but it should at least raise your antenna to look into whether anything may be going on.
How can audits help deter fraud?
Audits aren’t really designed to deter fraud, but just the fact that the books and records are being looked at could deter someone from committing fraud. Also, it’s a good idea to do surprise audits internally, for example, a surprise inventory count or checking the cash in the register to make sure that it reconciles with the tape.
What other things can a business do to deter fraud?
Make employees take mandatory vacation time. If people are doing something inappropriate, moving money around and hiding that activity, it’s good to get them out of the office for a week or two every year to see if anything surfaces while they’re gone. When someone is stealing cash from receivables, it becomes a shell game. And if they’re not there for a week to play that game, that may become apparent.
Also, if at all possible, implement a system of job rotations, which also helps limit exposure and disclose any fraud that may be occurring, and has the added benefit of cross-trained employees.
Even if it’s not apparent to you, one of your employees may be witnessing fraud. Holding fraud training for employees, managers and executives is very important. Teach employees what to look for, which should include some of the indicators of fraud. Depending on the fraud scheme, there are often red flags to indicate that fraud is occurring.
Employees need to understand what they should do if they suspect fraud and what the procedure is to address it. One way to get information you might not otherwise get is with a fraud hot line, ideally an external one, because employees are more likely to report their suspicions to someone they don’t work with. Employees can anonymously call the hot line, which then notifies management of the potential problem.
Finally, make sure you have adequate controls over cash. The person who is preparing the checks should be different from the person authorized to sign checks. Have controls over the stock of blank checks, and once checks are signed, do not give them back to the person who prepared them. The bank reconciliation should be preformed by a different person, who should also be going through the cleared checks to make sure the payees and the amounts are correct.
Lewis Baum, CPA/ABV/CFF, CVA, CFE, is associate director in business valuation and litigation consulting at SS&G Financial Services, Inc. Reach him at [email protected] or (800) 869-1834.