Preventing financial fraud

Last year was an active one
for fraud, so prepare for 2010

By Frank A. Suponcic, CPA, CFE, CFF

Fraud and embezzlement costs the construction industry millions of dollars annually. National trends indicate that organizations with fewer than 100 employees, like many contractors, are the primary targets.
This is a national problem.
Locally there have been increases in financial crimes in which employees of contractors have colluded with internal or external partners. From a public relations perspective, such revelations, indictments and convictions are damaging to the corporate contractor. Cooperation increases their chances of success, because collusion cases are much more difficult to detect, as the perpetrators tend to be more creative.
The good news is that they can be exposed if you are diligent about curbing fraud and embezzlement within your company. Additionally, statistics show that companies that institute effective fraud policies experience a material reduction in financial losses should economic crimes occur.
Measures to Implement
One of the most effective ways to minimize risk is to review and test internal controls continuously. The material discrepancies between what management thinks is in place versus what employees are actually doing can be significant.
You can also educate your employees and vendors about what is expected of them regarding fraud. Implementing a fraud hot line outside the company through which employees and vendors can report anonymously real or perceived fraudulent activity can be beneficial. This hot line can be tied in with the American Institute of Certified Fraud Examiners, local CPAs or law firms. The hot line should not be tied directly to company sources, though, because the people receiving the fraud alerts might be involved in the fraud.
It might be advisable to have your company’s bank statements sent to your house. That way, by examining the cancelled checks, you can personally monitor every check or wire transfer to make sure they appear appropriate. About 85% of all fraud that occurs is done through checkbooks and cash. So, simple mechanisms like reconciling every bank statement or setting up a physical lockbox for cash receipts can greatly deter fraud.
Review your shipping documents to verify that your merchandise is being delivered to your job sites or warehouse. We have worked many cases where company inventory has been shipped to an unauthorized location only
to be retrieved by a company employee, used personally, or
resold on the black market.
Providing economic incentives to employees to encourage them to report fraud is helpful, as is the willingness to follow up on tips.
Fraud policies
It is important to not only implement but to enforce your fraud policy. A surprising number of organizations have such policies in place but do not enforce them.
The policy is a ‘thou shalt not steal’ document that allows companies to communicate with their employees on the reporting procedures they should follow if they suspect fraud. The policy should be written and signed on an annual basis by all employees. It sets the tone by specifying that fraud will not be tolerated at any level of the work force and spells out the consequences to employees. The signed document is a valuable tool should they commit such a crime and fall back on an excuse.
The policy should outline specifically what constitutes fraud and explains what the consequences will be. It should include what activities are considered inappropriate and provide examples of fraud. Ideally, it should be disseminated to outside vendors and customers in light of the increase in collusion cases that involve people outside the companies.
Cost of a fraud policy
Some anti-fraud recommendations have a nominal dollar tag associated with them (whistle blower programs, fraud hot lines, changing where customer deposits are sent). Others are nothing more than changes to policies that are already in place.
Overall, the costs associated with instituting an effective fraud policy depend on how inclusive a company wishes to make it, but these costs will be worth it in the long run. BXM
Frank A. Suponcic, CPA, CFE, CFF is a specialist at Skoda Minotti. Find out more at www.skodaminotti.com.