Fraud Resources

Limiting Fraud!
Fraud costs companies all over the world billions per year! If you could eliminate fraud from your company, would you? Of course you would. Here we upload some of our "Fraud checklist" documents, designed to keep you up to date with the latest schemes and scams. You might not catch fraudsters in the act with these resources, but we're hoping you can detour future white collar criminals.

Below you will find the 'textbook' internal controls checklist, a suspicious behavior checklist, and more!

In 2010, 37.8% of reported fraud cases had a complete lack of internal controls!

Fraud Prevention

While we recommend a professional consultation for a more in-depth review of potential company fraud we would be happy to share with you some simple steps to deter internal fraud.

Interrelated Components
Control (operating) Environment: This is the atmosphere in which people conduct their activities and carry out their internal control responsibilities. Make sure you are 'setting the tone', by the policies that you are putting into effect. (I.e. policies by upper management, human resources – job descriptions, adequate training, disciplinary actions, etc.) Always have an anonymous hotline implemented for any issues that may arise (including items unrelated to Fraud).

**Attitude from upper management sets the tone for a low fraud risk environment. If minor unethical practices are overlooked (ex: petty cash theft) larger ones may be as well. The company's stance on fraud must be the same across the board, do not ignore unethical behavior. (Include this in the mission statement, offer fraud risk training, consistently offer reminders of ethical and fraudulent policies, have an audit process concentrating on areas of fraud.)

Risk Assessment: Assess risks at each department level, and process level. Identify risks and the potential consequences they may carry. Risks will vary by size of your industry and by the industry itself.

Information & Communication: Design and deliver fraud awareness training. Promote the importance of a fraud risk program and communicate the program internally and externally through the corporation's communications.

Monitoring: Assessment of all the implemented internal controls over time. Are they working? Do they need to be updated? Are the assigned employees correctly carrying out their job duties related to the internal controls?

Controlling Activities: No one person should be able to initiate, approve, reconcile, record, handle the assets, or be the report reviewer. You always need at least two sets of eyes!

Ghost Employee Scheme - issuing checks to fake employees, or previous employees who are no longer with the company.

Herman didn't seem to be the type of person who dabbled in the supernatural. But as a manager for a medium-sized company, he had hired more than 80 ghost employees to his payroll.

In 2012, any payroll related fraud scheme took, on average, 36 months before the perpetrator was caught.

Fraud Triangle Components
Opportunity arises when an employee realizes they can successfully get away with something. Are you monitoring your employees? Do you review your financial statements and understand them? If an employee knows you trust them 100%, they may realize they have both an opportunity to take complete advantage of the business, and they know they get away with it.

Incentives or personal motives could come from external factors such as pressure from the home life. Maybe an employee has fallen behind on their mortgage and looking at the possibility of facing a foreclosure in the near future. Perhaps your employee is going through a painful divorce, and does not have the funds to support the legal process. If you notice additional stress in an employee's life, it might not hurt to ask them about their current situation and how he or she plans to handle it.

Finally, Rationalization occurs when employees feel they have justification in helping themselves to company assets or business profits. Maybe they feel underpaid, under-appreciated, and overworked. Often times employees tell themselves they will pay the money back at a later date.

Internal Controls

Marcia Teal, a professional in forensic accounting, recommends annual reviews of your Internal Controls, as personnel and computer systems change. While Internal Controls will not always prevent unethical behavior these steps are a good start for both new & current establishments looking to improve the control they have over their business operations.

1) Segregation of Duties requires different individuals be assigned responsibility for different elements of related business operations. Example: Having different individuals perform required business functions creates a system of checks and balances. Otherwise if one employee is responsible for one business activity this employee could easily falsify a number of records concerning one asset.

2) Authorization of transactions and activities helps ensure that all company activities adhere to established Company guidelines. Example: Having an internal price listed of products & services keeps individual sales person from up selling a product or service for personal gain.

3) Pre-Numbered verified business documents and records provide evidence that financial statements are accurate. Controls designed to safeguard acceptable recordkeeping include the creation of documents that are both easy to use and track to prevent fraud. Example: always supply your employees with informative documents & records, use of pre-numbered documents, and be sure these documents are used in a timely manner.

4) Physical Control over assets and scheduling a year inventory analysis protects the company's assets. These control activities may include electronic or mechanical controls (such as a secure safe, employee ID cards, and security systems) or computer-related security controls dealing with access privileges or established backup and recovery procedures. Example: having a secure intranet, a live security system, and a physical check over inventory each year can deter employee theft of both tangible and intangible assets.

5) Independent Checks on performance carried out by employees/supervisors who did not complete the work being reviewed. This helps ensure the reliability of the accounting information and the efficiency of business operations. Example: At the end of the day when a retail employee counts his or her drawer, an internal auditor, supervisor, or manager should be verifying these records are indeed accurate.

For additional internal controls and a free internal control consultation please contact us at Marcia@tealcg.com

In 2012 43.3% of fraud cases were detected by anonymous tip, second to management review & internal auditing (14.6% and 14.4% respectfully).

In 2010 42.1% of fraud cases victimized private companies, second to public companies (32.1%).

Although anonymous tips are the most common way to detect fraud, the medium loss suffering by tip-related fraud cases was $144,000 in 2010. However, fraud detected by the Police had a medium loss of $1,000,000.

Behavioral Signs

Red Flags... (from most common to least common.)

Living beyond their means
Financial difficulties
Unusually close with vendor/customer
Control issues, unwilling to share duties
Divorce/family problems
Wheeler-dealer attitude
Irritability, suspicious, or defensiveness
Addiction problems
Past employment-related problems
Complain about inadequate pay

Preventive & Detective Procedures

Preventative
Segregation of Duties
Approval & Authorization Processes
Access Restrictions
Transaction Controls (both)
Physical Security (both)
Pre-employment screening

Detective
Transaction Controls (both)
Account reconciliations
Physical Security (both)

Have you tried data mining?
Data mining takes 100% of the electronic accounting activities and searches for relationships. For example: Accounts Payable transactions looking at vendor phone numbers, do any match your employee's phone numbers? Or different vendor names with the same address or phone number? Perhaps you can find an employee's SSN that is the same as vendor tax ID.

Downloadable Resources

**This is a new website! We hope you like it, but we are still working on adding downloadable PDF files. Sorry for the inconvenience, check back soon, or email our editor!

Insurance Policies

What kind of insurance protection does your business have? Based on our experiences, and past client cases we highly recommend the following in terms of insurance protection:

Have fraud coverage (fidelity insurance), this way your business insurer can help cover the cost of an investigation, any legal action, and any lost revenue relating to the incident (depending on your level of coverage).
Thinking about other areas of protection? View the SBA's recommended business protection here.

We do not sell business insurance, or any insurance for that matter. You should speak with your insurer directly relating to the above matters. We (Teal Consulting Group, LLC), in no way represent or provide business insurance, and business insurance related services. Since we're on the subject, we do not file business tax returns, or any type of tax returns.. Should in no way the information on this website trump the information you receive from your personal (or business) insurance (or tax) professional.