It is too often that we see news of embezzling funds within an organization. As forensic accountants at FAZ Forensics, we have investigated these matters in Albany, Saratoga, New York City, Boston, and all over the country. A common theme within these matters is limited internal controls within the organization.
According to the Association of Certified Fraud Examiners 2022 Report to The Nations on Occupational Fraud, it is estimated that organizations will lose 5% of revenue each year to fraud. Nearly half of the cases of fraud occurred due to lack of internal controls or an override of existing controls.
No matter the size of your company, take steps like the following to prevent embezzlement:
Segregate Financial Duties in your Organization
Where possible, functions such as bookkeeping, deposits, and reporting should be done by different employees. This can be critical if your organization has had layoffs or departures within the finance department as adequate staff to segregate is not possible. The ACFE report states that organizations with the fewest employees had the highest median loss on average of $150,000.
Set up Positive Pay or Reverse Positive Pay with your Financial Institution
With positive pay you send a list of checks to the bank that you approved. With reverse positive pay, the bank sends a list of all checks presented for payment. This will avoid someone including checks not approved.
Dual Signatures/Dual Authorization on Checks and Outgoing Wires for amounts over a Certain Threshold
The basic idea here is no one person, including one of the owners, CFO or other individuals, can single-handedly disburse substantial amounts.
Thoroughly Review Bank Statements and Corporate Credit Card Statements
The best way to start uncovering fraud is to review the bank and credit card statements. If anything looks suspicious, be sure to inquire about it. Review the statements regularly.
Cash Flow Projections and Budgets
A cash flow projection and budget are models against which you can compare your actual results. Review often, look for significant variances, investigate and find the cause. Aside from fraud, you can identify other problems in your business that need to be addressed.
Background Checks for Employees
It starts with the hiring process. Know how to interview and how to follow-up on their references. Especially those who will have access to or influence your business finances.
Management and Tone at the Top
Management needs to take an active role in preventing an embezzlement and ensure internal controls are adequate. The ACFE report states that lack of management review and a poor tone at the top contribute to embezzlements within an organization.
Hire a Consultant to Do a Periodic Review
It is always a good practice to have an independent review of your internal controls. The money spent on the consultant would be well worth it.
Another key point is to always be on the lookout for behavioral red flags that could provide insight to a potential fraud.
The ACFE report indicates in their study that only 6% of employees committing fraud had a prior fraud conviction and that a red flag was identified in 76% of the cases studied, so be on the lookout for some of these red flags which include:
- Employees that are living beyond their means.
- Employees having financial difficulties.
- Employees that have divorce/family problems.
- Employees that complain about inadequate pay.
- Employees that have addiction problems such as gambling, drugs, etc.
- Employees that have an unwillingness to share duties.
Remember, a typical fraud can last 14 months before being detected. If controls are not adequate, it could last for years and be the demise of an organization. Keep in mind that employees can only steal when they are not closely watched. Employees that are closely watched have a challenging time stealing. With that said, it is vital that you review the internal controls periodically within your organization.