13 Fraud Prevention Tips

My last 13 posts have been specific tips designed to help you do a better job preventing fraud at your company. My hope is that by calling your attention to the variety of ways that people commit fraud and by sharing these anecdotes you’ll be proactive in putting in place checks and balances and sticking to the kind of no-nonsense fraud prevention policies that keep businesses healthy and safe.

Let this post serve as a reference for each of the 13 Fraud Prevention Tips I’ve offered, and please feel free to add your own.

1. If Someone Commits Fraud, Have Them Thrown in Jail

2. Leverage the Value of an Informal Fraud Policy

3. Fraud Prevention Tip: Keep Your Security Room Locked

4. Always Have Someone Double Check the Payroll

5. Change the Standard by Which You Check Your Transactions

6. Don’t Rehire People Who Steal From You – Seriously

7. Focus on Checks and Balances that are Rechecked and Rebalanced

8. Take All Shortages Seriously

9. Always Poke Around Your Books

10. Regularly Monitor and Review Monetary Trends

11. Match Your Purchase Orders Against Your Invoices Before Putting the Invoices in Your System

12. Think About the Financial Impact of Rare Events on Your Business

13. Trust Your Instincts

Someone asked me why I did so many posts on Fraud Prevention that they ran right out of March – Fraud Prevention Month – and all the way to the end of April. As I mentioned in my very first post about fraud this year, preventing fraud is a year-round process. You need to be vigilant all the time, building a system that is internally monitored – and that monitors the monitors.

Please let me know what your fraud stories are, what tips you’d add to my list and how you prevent fraud.

Fraud Prevention Tip: Always Poke Around Your Books

When companies start the CEO or business owner is the one signing all of the checks. That’s just the nature of a start up and a small business.

But after a company grows and other people – CFO, controller, auditor, etc. – are put into the position of check signer, the CEO or a majority shareholder should double-check what’s getting paid.

Just look at a ledger, the checkbook or Quickbooks and see where money is going. Ask questions about that money. How often are we paying for X? What does company Y supply us with? Poke around the books and ask questions.

Silly Expenses

Even if you don’t find fraud, you’ll likely discover unnecessary expenses. I would say the latter is in fact more common in these cases. The reason is that people in Accounts Payable aren’t always informed when a piece of leased equipment is sold or returned or when the paper supplier wasn’t just changed but the first supplier was canceled. That’s because a lot of payables and other bills are just put on autopilot. They’re not checked every month or even every year.

I can’t count the number of times I’ve gone through a company’s expenses line by line, questioning everything with the CEO and the check-signer, and found thousands – if not tens or even hundreds of thousands – worth of expenses being paid that didn’t need to be paid. What a difference that makes to the bottom line of any business, much less one that hasn’t turned a profit in two years.

In one notable case, this routine check uncovered some major fraud.

Un-Silly Fraud

We discovered the fraud while doing a sort in an Excel spreadsheet on all of our vendors’ addresses; we were just trying to figure out freight costs and where we could save money. What we stumbled upon were two vendor companies: one in California and one in Indiana. Each was doing business with a stationary store in Chattanooga, which is where our home office was.

It would have made sense that there were vendors in California and Indiana to attend to our subsidiaries, but what didn’t make sense is that we were sending checks to these companies at a PO Box in Chattanooga – which, I reiterate, is where our headquarters was.

It turns out that the controller had created dummy vendors, theoretically for our subsidiaries in California and Indiana, and he was cutting checks to these dummy vendors for random amounts between $50 and $100 to a PO Box in Chattanooga. He would then go collect all of these checks and cash them in the name of these dummy vendors.

That’s a series of very small transactions that an auditor would never find even if he regularly dipped 20% below his “check everything” number. As a result, over the course of ten years this controller stole over a million dollars.

And again, we only discovered this because the CEO and I were poking around in the books trying to come up with useful ways of extracting unique, money-saving information. What hit us was something suspicious, and that’s why I always encourage you to look into the suspicious.

Slightly Silly Fraud

Another time I was working on a book store that had switched who it was banking with and who held its credit cards. But one of the credit cards wasn’t canceled – a Discover Card – and because it was so routine to pay off this Discover Card, the controllers just kept paying it. No one asked and no one thought about it. As it happens, the guy whose card it was just paid off his entire mortgage on the company (until I got there).

Just do a routine check through all of your transactions and payments. You’re bound to find some juicy things in there.

How often do you poke around your books?

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Fraud Prevention Tip: Take All Shortages Seriously

In businesses with checkout counters and cash drawers, it can be very easy to just accept a standard over/under on drawer counts. A number of other places that involve balancing books will also allow this to be so. I’m the first to say that if you’re balancing out $100,000 in revenue and find that you’re $86 off, you might just want to let it go as the trouble of uncovering that $86 is not worth the $86.

But what if someone had stolen that $86? Then would you want to know and figure out what had happened? Arguably, that changes the value of the $86, since this is unlikely to be a one time thing, but a recurring and growing “expense.”

So let’s say that you have a drawer that’s off by $14 one day. No big deal – that can happen, especially at a place that does enough business in cash on each drawer.

But let’s say that happens at a big department store like a Macy’s 5 days in a row. That cashier is going to get fired for one of two reasons. Either a. he’s an idiot or b. he’s stealing.

But let’s not forget to consider hidden option c. someone else is stealing from him because he’s an idiot.

Many employees know that a drawer can be off $20 a day without raising a lot of suspicion, and so they use other people’s cash drawers when their friends come in to the store and give them $10 too much change. By rotating whose drawers they’re doing this from, it makes it very hard to catch them. Watch for patterns and consistencies, like who’s regularly working on days that there are higher than usual collective shortages, even if those shortages don’t appear on their drawers.

Don’t jump to conclusions. Just be vigilant and chart the specifics of any inadequate drawer counts.

Many companies grow lax because everything’s been fine with their counts, but don’t make the mistake of ignoring the systems you have in place. You put them there for a reason.

On some level, you’ll have to make a judgment call on this one depending on the percentage under and who has his or her hands in your cash and your books. This tip isn’t as stark-raving obvious as don’t rehire people who steal from you, but I do want you to take all shortages seriously all the same.

What shortages are considered acceptable at your business? How frequently does that happen and what do you do about it?

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Fraud Prevention Tip: Don’t Rehire People Who Steal From You – Seriously

My lengthy post on the need to always prosecute those who steal from you included an exploration of those reasons that people fail to prosecute and how not doing so is a larger problem for the business world. Now I’m going to provide you with a very concrete story that I hope highlights why you always prosecute and why you never – ever – rehire people who steal from you.

I was once turning around a company at which a sales manager had a scheme with a customer.

The published sale’s price of this company’s primary widget was $8.50. The salesperson in question would place an order for a particular customer of his, ship the merchandise to the customer and then go to accounts receivable and put through a credit memo for that customer which would net the customer a price below the list price of $8.50. The customer would then slip the salesperson 50% of his savings. That is, the customer would pay $4.50 for the widget, thereby saving a total of $4/widget, half of which ($2) he would give back to the salesperson.

Because something like this can easily slip below the radar in a company with enough customers the financial impact might be minimal; thus, it’s very easy to go undetected for a while. The reason I discovered that this was happening was because the guy got greedy and started doing this with multiple customers. In his hastiness he put the credit through for the wrong company. The accounting department at that company was honest and came to us to disclose this erroneously applied credit. When we researched the credit we discovered what was happening, and the whole scheme unraveled.

As a result, this guy was fired (thank goodness) and never prosecuted (rats).

Apparently, this guy was an excellent salesperson, and even though he was ripping off the company for which he was working, he was simultaneously drumming up a remarkable amount of legit business. After he was fired the company’s sales declined by 25% over the next two years. Unsure of what to do and unable to find a suitable sales force to replace this one guy, the CEO rehired the once-thieving salesman (and as I always say, “Once a thieving salesman, always a thieving salesman”).

When asked why, the CEO said that the salesman had found God, repented for all of his sins and begged forgiveness. Though he never made monetary restitution for his misguided ways, he nonetheless apologized sufficiently enough for the CEO, who rehired him to return the company’s sales to a profitable level.

Lo’ and behold, six months later they (finally) put the salesman in jail because he started stealing again. Don’t make me say the following twice – please.

Do not rehire people who steal from you – ever.

This one is not a tip or a simple recommendation – I’m imploring you.

I believe in second chances in life. We all screw up at one point or another, and I dare say, we all deserve to find forgiveness. Despite that, do not rehire people who steal from you. If you think that you might not be able to keep to this because you’re such a forgiving person, then put it in your company’s bylaws to prohibit you from rehiring thieves despite your wishes otherwise.

Do not rehire people who steal from you. Seriously.

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Fraud Prevention Tip: Always Have Someone Double Check the Payroll

There are a number of good payroll services out there that will handle all of your payroll needs. All you do is enter employee hours or salaries into the system and – poof! – everybody gets paid on Friday.

Many businesses opt not to engage a service like this; perhaps they don’t like the technological integration, perhaps they like to keep things in house, or maybe they just don’t know such services exist. Whatever the reason for not contracting out one’s payroll, if you do payroll in house, make sure someone is double checking the work.

And that brings me to Aunt Tess.

Aunt Tess was a payroll clerk I once had the pleasure of encountering. She’d been working at the same company doing the payroll for over 25 years, and everybody loved Aunt Tess. After all, that’s why they all called her Aunt Tess.

Well, I suspected something fishy was going on when Aunt Tess came into work the day after an appendectomy to do the payroll. There she was, just handing out pay checks as if 18 hours earlier she hadn’t been split open unconscious on an operating table.

Really, Aunt Tess? Not even a day of recuperation?

I inquired and learned that in 25 years Aunt Tess had not missed one single payroll day. Not one. Does that strike you as bizarrely as it struck me?

At a big company, no one knows all the hourly people’s names, and this was a fact that Aunt Tess had been methodically exploiting for a quarter of a century.

As it turned out, she’d created a handful of specious hourly employees, whose concocted existence allowed her to steal between $75,000 and $100,000 a year. She’d just hand out checks, hold on to her unknown friends’, and deposit them into bank accounts that she controlled.

It was both elaborate and simple. Considering the love for Aunt Tess both from management above and employees all around, everyone was quite shocked to learn of this betrayal, and their inclination to forgive her is something we’ll explore in future tips.

But for now, I’ll leave you with a reminder of this tip: Always Have Someone Else Double Check the Payroll. You never want just one person doing your payroll.

Do you have just one person doing your payroll? What kind of check will you put in place now? Let us know in the comments below or ask questions if you need some suggestions.

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Fraud Prevention Tip: Keep Your Security Room Locked

When I prepped you for this series on fraud, I mentioned that some of the tips were going to seem a little obvious. This opening tip should seem head-slappingly “duh,” but you’ll have to believe that the example is nonetheless true.

I was working on a company in Dallas where all the surveillance equipment was kept in one room. Logical, right? But delightfully for those interested in doing wrong by the company, this so-called surveillance room was kept unlocked all the time.

That may be fine in these days of digital data automatically uploaded to secure servers and kept for months, but this was back in the days of video cassettes – a time when the data was in one place at one time and easily destroyed.

As you can imagine, this place had a theft problem. And after people would steal something, he would walk right into the surveillance room, change the tape or erase it; and sometimes before committing a crime the thief would just stop the VCR for the duration of his crime.

So, my Fraud Tip:

Keep Your Security Room Locked.

Do not let this happen to you! Having security equipment is great, but you have to secure the security equipment.

Is your security room kept locked or unlocked? If you don’t know, please go check right now.

Fraud Prevention Tip: Leverage the Value of an Informal Fraud Policy

We’ve been talking about fraud, and last week I asked you to create a fraud policy if you didn’t already have one. Pardon me for assuming that you don’t already have one but experience tells me you don’t. What you may find that what you do have, though, is an informal fraud policy – and you may not even know it.

Though I insist that an official, stated, written and shared Fraud Policy is important, I will be happy knowing that you also have an informal fraud policy.

An informal fraud policy is one that is implied by your actions and the state of things around your business – like security – but that is not directly stated. An informal policy is also known as a psychological fraud policy.

The Circuitous Route

I once ran a retail chain out of Delaware. The shrinkage was 5 or 6%, and when the company was doing 100 million dollars a year in business, we weren’t talking about an insignificant number here. That was about 6 million dollars a year of stolen goods.

Before I got there, when a cashier or sales associate was caught stealing the manager would have that person quietly taken into the back, loaded into a police car and inconspicuously taken to jail. But this is not Victorian England, and we need not be so discreet.

When I started running this operation and I caught someone stealing, I had multiple police officers parade them through the store in hand cuffs in a circuitous route. The police car would be out front lights swirling and sirens blaring, and the perpetrator would have tears coming out of his or her eyes. I wanted everyone to see, from employees to customers to management.

The Effects of the Roundabout Way

That policy resulted in a reduction of shrinkage by 50% in the first month. Over the course of the year that translated into three million dollars saved because people became far more terrified of the embarrassing consequences of getting caught stealing. They knew that I would take real and serious action against them and prosecute them for stealing.

Another example of a psychological fraud policy is a warehouse at which I had a ton of merchandise walking out the back door. All I did was stick a camera right outside that door, drill a hole in the wall and feed a little wire through. That camera and wire didn’t even go anywhere! They weren’t hooked up, but just putting it there scared everyone enough to stop stealing. Shrink declined immediately and dramatically.

Those are examples of informal and psychological fraud policies. Neither is stated in words on a sign, but they are actions that are regularly being taken agains those who are stealing and committing fraud, and employees understand the consequences of those actions.

Do you have an informal or psychological fraud policy at your business? If so, what is it and if not, what sorts of measures could you put in place to have one?