Fraud Prevention Tip: Change the Standard by Which You Check Your Transactions

My last tip concerned reviewing the payroll, but anybody running a business knows that’s far from the only expense that fraudsters can tamper with.

Many companies have expense reports. Sometimes they come from traveling consultants or a sales force. Other times they’re the domain of local managers who take associates and leads out for meals and entertainment. Whatever it is, expense reports get handed into the appropriate department, reviewed by the person in charge, checked off and paid out.

However, what I’ve seen is that for every salesman and consultant who has his expense reports checked, there is someone whose expense reports are getting glossed over: C-level and other senior employees.

There are rarely checks and balances on these people. Sometimes the CFO is even writing his own checks – and that’s a problem. All systems require checks and balances – a theme you’re about to see resurface again and again over the course of these coming posts – and when it’s assumed that senior managers’ and officers’ expenses don’t require review you’re going to run into problems.

The CFO at a manufacturing company in Suwannee, GA knew that the golden audit number for an automatically reviewed expense was $5,000. Thus, he was writing himself tens of thousands of dollars in expense-related checks, each in the mid $4,000 range.

The mistake the company made was that these checks took two signatures but the senior person who was acting as the co-signor on these checks wasn’t double checking what he was signing. We found $180,000 worth of recent fraud. Lord knows what had been buried for ages.

The reason I suspected this was happening is because the CFO dragged his feet about getting us some of the information we wanted during our review process. That raised my concern about other issues he was and wasn’t sharing with me.

When I go into a company that’s losing money I always look at the expense reports of senior people, and when these two issues crossed I easily discovered what was happening.

Make sure that any check co-signor or anyone whose job it is to sign off on checks and expense reports understands the seriousness of what he or she is doing and doesn’t make the action a perfunctory one. You want people in those positions who ask questions, are naturally suspicious and who are willing to bring larger issues straight to the CEO.

Change the standard by which you check your transactions.

Auditors set their own level of what kinds of transactions to review and at what number (in this case, $5,000). Though auditors will occasionally spot check below that number, make sure they’re regularly peeking at any transaction above 80% of that number (in this case $4,000). I’ve found that to be, more or less, the sweet spot of those committing this kind of fraud.

What level do your auditors automatically check? What will you have them do now?

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One thought on “Fraud Prevention Tip: Change the Standard by Which You Check Your Transactions

  1. Pingback: The $5,000 Dollar Magician and the Real Element of Disbelief « The Turnaround Authority

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