Top tips for recognizing fraud

Fraud can be detrimental to an organization, both financially and culturally. Over the years, we have encountered many cases of fraud in a variety of industries. The following three examples reflect fraud our specialists have either discovered or helped investigate, along with behavioral warning signs and tips for preventing similar acts in the future.

Fraud #1

A payroll employee at a public sector client increased pay rates for another employee, resulting in the employee being overpaid roughly $50,000 over a three-year period. The payroll employee was the only person in the payroll function.

Behavioral warning signs

The employee, being the only employee in the payroll function, was unwilling to share duties.

Tips for future prevention

Segregation of duties in the payroll department should be implemented. A separate employee, generally a member of management, should review payroll reports, comparing actual pay rates to the pay rates authorized by the appropriate personnel, i.e., the employee’s supervisor.

Although the following two instances of fraud occurred at private companies they are still relevant to the public sector.

Fraud #2

The long-time controller of a retailer stole from the company in excess of $700,000 over a period of at least ten years. The controller perpetrated the fraud by paying personal credit card bills with company funds and using the company credit card for illegitimate expenses.

Behavioral warning signs

In hindsight, the controller was likely living above his means, which is the most commonly observed behavioral red flag, as noted in the Association of Certified Fraud Examiners’ 2012 Report to Nations on Occupational Fraud and Abuse. The controller was also exhibiting control issues, was unwilling to share duties with others in the accounting department, and was reluctant to take time off. He also gave management the appearance that he was a watchdog who did not let anyone get away with anything.

Tips for future prevention

Someone other than the person who pays the company credit card bill should review actual credit card statements, and any unusual charges should be investigated. If this proves to be too time-consuming, consider discontinuing the use of company cards, requiring business expenses to be paid for by the employees as necessary and reimbursed through the expense report process. Employees are less likely to overspend on their own credit card.

Fraud #3

The employee of a construction company stole approximately $100,000 from the company over a number of years. When customers came to the office to pay in cash, the receptionist accepted the cash and created a list of cash receipts, then delivered the cash to the employee for deposit. The employee only deposited a portion of the cash, sometimes depositing nothing at all. The employee then altered the bank statement so that it agreed to the accounting records, made a copy of it, and disposed of the original document

Behavioral warning signs

The employee refused to take vacations and was unwilling to share duties.

Tips for future prevention

Appropriate segregation of duties must be implemented. The bank statement should be sent to and reconciled by someone other than the employee responsible for depositing amounts received. Original copies of bank statements should be maintained whenever possible.

Unfortunately, it is too often trusted employees who commit fraud, particularly in organizations lacking appropriate segregation of duties. This highlights the need to design and implement a strong internal control system and to invest in a sound accounting function. For additional information on fraud-related topics, refer to the August 2012 issue of the Journal of Accountancy. You can also contact our state and local government team for specific questions you might have related to your organization.