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Defending Against Financial Fraud

Published Tuesday Dec 4, 2018

Author Melanie Plenda

Defending Against Financial Fraud

Trust between employer and employee is a key element in any business. But that trust doesn’t have to be blind and it shouldn’t be, particularly when it comes to the firm’s money management.

“Fraud usually occurs when the owner doesn’t ‘trust but verify,’ and that’s the key,” says Wayne Geher, a principal with Nathan Wechsler in Concord and certified fraud examiner. Some business owners trust their bookkeeper implicitly, he says, adding, “Usually the trust comes from, ‘She’s been with me for 20 years; she always [seemed to do] everything right.’” Though it routinely goes unreported to authorities, financial mismanagement and embezzlement can happen to any firm. There are red flags to watch for and easy steps a business leader can take to reduce the risk of fraud by an employee.

First, says Leslie Walker, CPA and a director at Mason + Rich Certified Public Accountants in Concord, don’t give too much financial authority to one person. She encourages owners to segregate roles.

When one employee has access to multiple job responsibilities, such as writing and signing checks or collecting and recording cash receipts, the employee has too much power and authority, says Scott R. Berube, a principal lecturer on accounting and finance for the Peter T. Paul College of Business and Economics at the University of NH in Durham.

While that’s a common setup in a small business, it’s not a good one. With no checks and balances in place, Berube says there is nothing to keep the employee honest except their own moral code, and that can be exploited. “So the simple thing would be, not giving check-signing authority,” Walker says, “or if you do give check-signing authority, make sure the bank statement comes to you so you can see it.”

Even the most trusted employee can be in a situation where they can justify skimming money here and there from the company, whether it’s because they are in a bind and need to purchase personal gas on the company dime, or they are about to get evicted and need a little rent money.

“In my opinion, the biggest mistake made by business leaders that makes it easier for fraud to occur is having the belief that their employees would never commit fraud in the first place,” Berube says. “Almost everyone is capable of committing fraud if presented with the right opportunity, pressures, and ability to rationalize their actions. If business leaders do not believe that their employees are capable of such actions, they will not implement the necessary internal controls to mitigate the risk of fraud.”

Bank Statements
That idea leads Walker to another simple, yet important safeguard business leaders can employ: Read the bank statements.

Walker recalls a client whose office manager was stealing from the company, which went unnoticed as the business owner didn’t even open their bank statements. “They had given that person authority to write checks, sign checks, [and even] reconcile the bank statement,” she says. “If at any point in time they would have actually opened the bank statement and looked at the check images there, they would see that there were checks written out to credit card accounts and furniture stores, and even that the person actually wrote checks out to themselves. It was all there for them to find, but they just never opened [the statements] up.”

Protecting the Business
These frauds are never complicated schemes, Walker says. The scheme tends to be obvious if someone had only looked. But most clients don’t look until it’s too late, says Geher, primarily because the employer says they don’t have the time for such oversight, and they also don’t want to appear to be mistrustful of the employee.

There are a few ways to address those issues. One way is to conduct spot checks, Walker says. If an employee knows that the boss will be checking the books, payroll or production records, even at random intervals, it will give the person pause since there will be a risk of being found out.

Further, Geher strongly suggests having bank statements sent to the owner’s home rather than to the office. If they are sent to the bookkeeper at the office, employers need to open the envelope and initial the pages, whether they have actually reviewed the documents or not. What this does, he says, is create the appearance that someone is checking those books. If you never check, if you convey nothing but complete faith and confidence in your bookkeeper, then it’s as though you are giving the person permission to steal.

Geher says it is important to find time to do these things. For example, Geher says he was working with an orthodontists’ office. He came in for a planning meeting where the principals were there along with their bookkeeper.

“They’re telling me what a great job she’s doing and they trust her implicitly. So they just told her, you can steal from me,” he says. Geher told the orthodontists to ask the bookkeeper to run a production report each week that would show how many new patients the practice had, what procedures were done that week, and the like, and put it onto their desks for review and initialing. If in any week the numbers varied wildly from what the orthodontists expected to be taking in, they would know to start asking some questions.

“When I told these doctors to do this, they said, ‘We don’t have time to do that; we’re not bookkeepers,’” Geher says. “About a year and a half later, they called me up and said we have to meet with you right away. I went down to their office, and they said, we think money is missing. We went through it, and sure enough, they weren’t looking at any reports, they weren’t doing what I asked them to do, and the bookkeeper stole from them.”

It’s also a good idea, Walker and Geher say, to spot check or regularly check payroll accounts and approved vendor lists, since bookkeepers with the authority to add people and vendors could add fictitious employees and generate invoices for vendors that don’t exist. Keep an eye out for purchases from places that make no sense or purchases that seem high for what was actually bought.

Consistent budget overruns could also be an indicator that embezzlement is occurring, Berube says. “Often the money stolen is charged to expense accounts resulting in actual amounts that are more than the amount budgeted,” he says. Also, spot check the vendors to make sure they are legitimate companies and double check that you are paying the correct number of employees each pay period.

Other Clues
The bookkeeper’s behavior may also throw up some red flags. For instance, if they never take a sick day or vacation, that could indicate that they are worried their scheme will be discovered while they’re gone. Geher says a bookkeeper who acts overly territorial with their work—won’t allow others to pick up slack when they are overworked, gets offended when someone looks at the books or goes into their office—could also be a sign of trouble A bookkeeper who seems to be living beyond their means—shows up with expensive clothes, watches or cars, takes lavish vacations—also could be signaling that they are stealing.

But, Berube cautions, these things also may have perfectly reasonable, innocent explanations. “Just because an employee has too much authority does not mean they will abuse it,” he says. “Likewise, an employee who never takes vacation or sick days may just be very dedicated. The employee driving the expensive car may have inherited money, and the budget overrun may be the result of improper planning. It is important to avoid jumping to any conclusions without first looking at the big picture.”

This is why it is important to have evidence before confronting an employee with your suspicions. For large organizations, a company’s internal audit department can launch an investigation. For small businesses that may not have the resources to conduct an investigation, they can reach out to their external auditor or Certified Public Accountant. Berube adds that they can also contact a Certified Fraud Examiner for assistance with the investigation. The Association of Certified Fraud Examiners ( is another helpful resource.  

Finally, Berube says, having an office culture that respects ethical behavior and honesty and allows employees to come forward if they suspect something can be a major safeguard against fraud. “Another common mistake is failing to provide some method for employees to report suspicious behavior. If they suspect their supervisor, they may be too intimidated to report the behavior or may not know how to do so. Having an anonymous tip line for employees to report suspected fraud and abuse can help with this,” Berube says. “It is also important for businesses to communicate the importance of ethical behavior and to make sure employees know what is and is not acceptable. A good way to do this is by implementing a Code of Business Ethics and Conduct so employees understand what is expected.”

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