Frauds are often perpetrated by “long-time trusted employees”
The phrase “long-time trusted employee charged with (convicted of) stealing” has become all too common in news reports. A quick search of the internet yielded the following hits:
An accounts payable clerk for a Catholic Diocese wrote hundreds of checks to pay for more than $1 million of personal expenses.
A sales executive stole over $100,000 from his company by using his company credit card for personal use.
An assistant branch manager, acting as a loan officer, at a small local bank embezzled over $500,000 by issuing fictitious loans in the names of real borrowers.
A Chief Technology Officer for a health foundation bilked the health provider of approximately $1 million for overpriced computer consulting services and payments to fictitious vendors.
Long-time employees, who are trusted by management, are often able to perpetrate the most damaging frauds because their experience provides them with insight into potential internal control vulnerabilities and the level of trust placed in them by management can be so high that there is little or no oversight over their activities.
There are several proactive steps that a small enterprise owner or executive can take to try to reduce the likelihood of being victimized by a “long-time trusted employee” fraud scheme.
Employee background checks and screening - For any position that involves the handling of financial transactions, criminal background and credit checks should be performed in order to assess whether a prospective employee has a criminal history or potential pressures to commit fraud (i.e., bad credit). It is also recommended that such checks be performed periodically throughout an employee’s tenure, which also requires that employees authorize their employers to obtain this information.
Direct receipt of statements from financial institutions (bank account, credit card and loans) – These statements should be addressed to and opened by the owner or other non-financial company executive for review prior to providing these records to the accounting department. The review should focus on missing checks, non-sequential checks, unknown payees, irregular check endorsements and/or other unusual activity.
Mandatory vacation - Employees who commit fraud often resist taking vacation time because they fear that their fraud scheme will unravel if they are away from the office. The implementation of this policy can result in the uncovering of fraud or it can also serve as a deterrent to a would-be fraudster.
Surprise audits – Conduct surprise audits periodically for different transaction cycles. This can make it more difficult for a dishonest employee to continue to conceal a fraud and can also function as a deterrent.
Segregation of duties – Management should strive to ensure that no employee is in a position to both perpetrate and conceal fraud. The primary duties that need to be segregated are: 1) Custody of Assets 2) Authorization or approval of transactions 3) Recording or reporting of transactions. Sometimes, adequate segregation of duties is difficult to achieve in a small company due to resource constraint. However, by evaluating whether there is proper segregation of duties, the organization can at least determine areas of potential weakness and develop or enhance other controls that could address gaps related to the lack of adequate segregation.
Pay attention to employee behavior – If you notice sudden behavioral changes in a long-term employee, such as extravagant spending, gambling, borrowing from co-workers, work ethic, etc., there may be reason to suspect that fraud might be occurring.
Schneider Downs can assist you with assessing your current fraud mitigation program or help you to design one. To learn more about how Schneider Downs can help you, please contact Joel Rosenthal, Shareholder, or Marc Brdar, Senior Manager, at (412)-261-3644.
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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Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax, or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.