Fraud Control in Your Business

Manager’s Toolkit: Fraud Control
From “Business Matters”
Published Quarterly by Serbinski Accounting Firms

But I Just Paid That!
Fraud Control - Business People WorkingFraud is a million dollar problem for small businesses. Even more significantly, many frauds go undetected – perhaps 75% – and many which are detected do not get reported.

Most small businesses would be surprised to know that manipulating accounts payable is an easy means to relieve a company of its hard earned funds. Termed "on-book" frauds, these deceptions normally occur at the point of payment and involve such factors as phoney suppliers and ghost employees.

Too often these business frauds are possible because of the action of, or collusion with, employees. A review of some of the more common fraud schemes actually uncovered in small businesses can help you improve your internal controls and protect your bottom line.

Phoney Suppliers
This method involves fabricating invoices for suppliers that do not exist. Often, the invoice bears a company name and logo strikingly similar to that of a supplier actually used by the company.

Duplicating Invoices
In this "high-tech" world, invoices can be easily duplicated for existing suppliers and fake orders invoiced. The fraudulent party simply indicates a different mailing address on the modified invoice.

Re-directed Orders
Supplies are ordered by an employee who requests the order be delivered to another location.

Returned Goods
An easy means for a corrupt employee to obtain funds is to pocket the proceeds when returning goods to suppliers. This can be achieved in a number of ways. Rather than return the goods, an employee sells them to a third party, or the goods are returned for a cash refund.

Charge Accounts
To accommodate staff needs, businesses sometimes establish charge accounts with local suppliers, which an unscrupulous employee may take advantage of.

Kickbacks
Purchasing agents can be offered kickbacks or incentives at the expense of your company. Naturally, if a supplier is going to provide incentives for your purchasing agent to buy exclusively from them, the cost must be passed on to you. Another common scheme is having the supplier overbill for merchandise and then splitting the difference.

Automatic Billing
Invoices that are paid by cheque or direct debit on a recurring basis may be authorized automatically. Once an authorized payment is entered into the system, it may be many months, even years, before someone realizes that the company is not receiving value for the dollars spent.

Off-Setting Accounts Receivable
Offsetting accounts, rather than paying a debt by cheque, makes it easy for the unscrupulous employee to divert funds destined to pay accounts payable to another source.

Prices in Excess of Contracted Amount
Prices established by contract may be inflated on the final invoice or volume discounts negotiated at the time of an order may not appear on the final billing.

Payroll
Common schemes for payroll fraud include non-existent or ghost employees, fictitious hours and overtime abuses, overstating expense accounts, and fictitious or overstated medical claims.

Unsubstantiated Reimbursement
Hundreds of thousands of dollars are lost each year in falsified travel expenses. Perpetrators may submit excessive mileage charges, business class rates for economy travel, inflated gasoline receipts, or meal receipts falsified by either the eating establishment or the employee.

Nonexistent Services
Each year, Chambers of Commerce and Better Business Bureaus are swamped with complaints concerning telephone directory invoices, which request payment of hundreds of dollars for a service that is often not provided or ordered.

Take Preventative Action
Accounts payable should garner the same respect as inventory, cash or accounts receivable. Management involvement in the day-to-day affairs of an organization is helpful, but nothing lessons the impact of wrongdoing as much as a well designed system of internal controls.

Prevention of fraud can best be achieved through fraud awareness, effective tendering and budgeting, and knowledge of your suppliers. Other prevention controls include proper documentation, approvals, and segregation of duties.