If someone asked you to come up with an example of fraud, several pictures might run through your head. Maybe you envision an employee stealing money from the petty-cash box or someone walking out the door with a company laptop. What if an employee created a fictitious vendor or a ghost employee and is receiving payments from the company? Any of these situations can happen – but can it happen to you?
A recent study “estimated that the typical organization loses 5% of its revenues to fraud each year” (Report to the Nations on Occupational Fraud and Abuse – 2012 Global Fraud Study). This percentage may appear to be trivial, but in actuality it could add up to a significant dollar amount that is flying out the window, at your company’s expense. The question that business owners need to ask themselves is how to prevent this from happening. The answer: implementing strong internal controls within the day-to-day processes that work effectively.
At this point you’re probably rolling your eyes because you know there are already internal controls in place at your company. But, are those controls actually working the way they need to in order to prevent or detect fraud? The most effective internal control that no company should go without is Segregation of Duties (SoD). In practice, this can be the most simple control to establish and can prevent numerous types of fraudulent activity from happening.
For example, take Payroll Pete, a payroll clerk at XYZ Company. Payroll Pete mischievously continued to include terminated employees within each month’s payroll and also updated their addresses so that paychecks would conveniently be mailed to a PO Box, for which he held the keys. Controller Carl reviewed the payroll entry each month, but the wages for a couple extra employees never really stood out, and the month-to-month payroll looked reasonable. Payroll Pete went on to slowly steal thousands of dollars so that one day he could achieve his dream of buying a beach house in Florida, without anyone being the wiser.
Had the Company separated the payroll function from the HR function and incorporated the proper SoD, the Payroll Pete scandal could have been prevented entirely. You work hard to build your business, so why wouldn’t you make sure it’s properly protected against fraud? Make sure your controls are appropriately designed and segregated, where needed, so that you can slam that window down on Payroll Pete’s greedy, no good fingers, and stop your Company’s money from flying out.
This blog was coauthored by:
Megan Quinn is a Manager in Meaden & Moore’s Assurance Services Group. She provides public accounting services to a wide variety of clients in various industries, including construction, manufacturing, and distribution.
Hillary Kastelic is a Senior Accountant at Meaden & Moore. She coordinates and oversees daily fieldwork, prepares financial statements and executes various other aspects of the assurance engagement.