Disbursements Fraud: Mitigation Basics

Business Advisors|Fraud/Investigative & Forensic Accounting

By Marc Brdar

Some simple steps to minimize the potential of funds misappropriation

Although high-profile financial statement frauds have consistently dominated the headlines throughout this decade, asset misappropriation schemes, including disbursements fraud, occur on a much more frequent basis. The Association of Certified Fraud Examiners (ACFE) reported in its 2008 Report to the Nation on Occupational Fraud and Abuse (Report on Occupational Fraud) that asset misappropriation fraud accounted for 88.7% of the total cases of occupational fraud identified by respondents to its survey of Certified Fraud Examiners.

Disbursement frauds typically start out relatively small, increase as a perpetrator gains confidence that he can get away with it and can last several years from the time it begins until it is discovered. In many instances, when it is discovered that an employee has stolen thousands of dollars from his employer, members of management are often shocked, and they struggle to comprehend how it could have happened in their organization.

Often, management eventually realizes that there were several basic things that it could have done from both an organizational culture and an internal control standpoint to either detect the fraud earlier or to stop it from occurring altogether.

The following are some basic ways to help to prevent fraud:

Employee Background Checks
Companies should consider making it standard operating procedure to obtain a release to obtain background and/or credit reports from all prospective and/or new employees, who will have any type of authorization to transmit company funds.

In the event that a company receives unsettling information from such reports, management can rhetorically ask the question: “Given these facts, am I comfortable with this person handling my company’s finances?” In far too many cases, companies learn of a swindling employee’s sordid past only after they have already been ripped-off.

Of course, companies must exercise caution to ensure that such release agreements are properly worded to protect them from any civil actions and to ensure that they are not violating employment law in their jurisdiction.

Company Culture
The absence of a strong ethical culture is often a harbinger of fraud. Management that does not deal fairly with its employees, customers and vendors should not be surprised when an employee might decide to turn the tables on them to “get their fair share.”

The easiest way to put it is that if the company is truly involved in transparent value-propositions with its stakeholders, it is less susceptible to being a victim of fraud.

Additionally, if a Company is not willing to attract and compensate the talent required to execute and process its financial affairs, it is often left with those without the ethics or wherewithal to oversee the financial operation.

Other entity-level controls include the following:
• Anonymous Fraud Hotlines
• Surprise Audits
• Internal Audit Department
• Policies and Procedures Manuals

Personality Traits of Those in Positions of Trust
Yes, it could be overwhelming to attempt to know every minute detail of a subordinate’s duties, but in general, a person who is willing to discuss in great detail and typically provides management with more information rather than less, is someone who probably doesn’t have much to hide.

Also, it is recommended to have people in the accounting department who are sticklers for detail and unafraid to shine the light on potential fraud activities, even if it involves high-level employees.

By employing such individuals, your organization can help to ensure that those with access to the Company’s assets will not be compromised and can help to ferret out financial indiscretions as early as possible in the event that they do occur.

Transactional Controls Basics
In order to mitigate the risk of disbursement fraud at the transactional level, there are several basic controls that can be instituted relatively easily, as follows:

  1. Review of Vendor Master File:  Typically, the individual who enters invoices into the accounts payable module should not have the ability to set up new vendors. At a minimum, a more senior member of the accounting team should regularly review of new vendors added to the system.
  2. Check Stock Control:  The number sequences of checks issued, voided and unused should be maintained by accounts payable and periodically reviewed by an Accounting Manager or other designee.
  3. Positive Pay:  Positive pay is a mechanism whereby a company electronically transmits a file to its financial institution upon the completion of each check run. The financial institution then compares checks presented to the data received from its customer, prior to cashing the check.
  4. Check Signing:  A threshold should be set whereby all checks that exceed a certain amount require at least one (preferably two) manual signature(s) by a member of management.
  5. Purchasing Cards:  Prior to the issuance of any company purchasing cards, ensure that adequate controls are in place. There are many automated controls that can be put into place with the assistance of the applicable credit card company.
  6. Electronic Funds Transfer (EFT):  A secondary level of authorization should be required for all EFT transactions before such transactions can be executed by the bank.
  7. On-line Review of Banking Activity:  Accounting management should periodically review activity in its bank accounts via web-based access into its accounts.
  8. Bank Statement Review:  Bank statements should be opened and reviewed by individuals who do not process payments or cash receipts and/or perform the monthly bank reconciliations.
  9. Bank Account Reconciliations:  Bank account reconciliations should be prepared in a timely manner each month by and reviewed by someone at the Accounting Manager level or above. 

Although the controls presented above are by no means all-encompassing or foolproof, following these steps can greatly reduce the exposure of disbursements fraud to an organization.

Schneider Downs can help you to proactively identify fraud risks or perform forensic accounting investigations in the event that improprieties might be suspected in your organization.

Marc Brdar is a Senior Manager in the Business Advisory Services practice at the Pittsburgh office of Schneider Downs.

Schneider Downs provides accounting, tax and business advisory services through innovative thought leaders who deliver the expertise to meet the individual needs of each client. Our offices are located in Pittsburgh, PA, and Columbus, OH.

 This advice is not intended or written to be used for, and it cannot be used for, the purpose of avoiding any federal tax penalties that may be imposed, or for promoting, marketing or recommending to another person, any tax-related matter.

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