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?


Fraud Prevention Tip: If Someone Commits Fraud, Have Them Thrown in Jail

One thing I consistently find to be true is that, from a legal perspective, 75% of people who are caught stealing and committing fraud are first time offenders. That’s not because it suddenly occurred to them that they could steal and supposedly get away with it; these are people who have been caught in the past but who were never prosecuted.

That’s right – people catch other people stealing money and inventory from them and don’t use the law to prosecute them, whether for restitution or punitive reasons.

Why Don’t People Prosecute?

People don’t prosecute for a few reasons.

1. It seems easy for us to say, “Oh my gosh. Someone was stealing from you? You had them arrested and sued them, right?” After all, if someone broke into your home and stole your grandma’s diamond necklace, you would sue them, wouldn’t you? Of course you would, but for some reason when people work for us and we feel like we know them, we want to forgive them and not mess up their lives, so we fire them – but we don’t prosecute. However, if people don’t go to jail, they don’t learn their lesson (this isn’t some legalistic philosophy I stick by – this is based on the experiences that I’ll flesh out more below and in future posts).

2. Prosecuting seems messy. It creates paperwork, involves lawyers, and it takes time, energy and more money, and you’d rather not lose more considering that someone’s been stealing it already, right? Wrong. You can get some of that money back if it can be had, and the mess is worth the trouble.

3. It’s embarrassing. People think it’s embarrassing that someone was stealing from them and they didn’t uncover it sooner. They don’t want other people to know, whether employees, the public, friends or family. They don’t want a big deal made, attention attracted, ill will and weird feelings. It seems icky somehow and people seek to avoid the associated feelings.

What Are the Consequences of Not Prosecuting?

When people don’t prosecute it hurts everyone and it’s bad for the larger business world. In the long run, when people prosecute it benefits everyone, from employers and industry to the average honest worker who deserves a job for which he’s not competing against thieves.

One of the biggest problems of not prosecuting those who steal and commit fraud is that you can’t say to their next potential employer that they’re thieves. Legally, if you fire someone for theft but don’t prosecute in a court of law, you can’t say that he’s a thief. That means you have to say that you chose to part ways amicably or you will be seen to be impeding his ability to acquire gainful employment without legally proving the reason he doesn’t deserve it. The word that comes to mind here is poppycock!

Prosecute thieves and those who commit fraud to ensure that you can tell future employers the information that they deserve to know. Then you can let those employers make informed decisions about who to let in their businesses.

Again, those who commit fraud aren’t first time offenders – they’re just getting caught for the first time and prosecuted. Do us all a favor and make sure people are prosecuted for their crimes.

Have you ever prosecuted someone for fraud? What happened?

Have you ever chosen not to prosecute someone for fraud? Why not?

Old Tricks by the Fed and D.C. Don’t Stimulate the Economy

As you may have read, some former Fed Officials are suggesting a new round of securities purchases to spur the economy. They claim that this move is in response to stifled job growth and  continued recession issues.


Well, I used a harsher word before, but this time I’m going with shenanigans.

Purchase a new round of securities? Are you kidding me? Are they really shortsighted enough to think that this move will get the economy moving. This is part of the Fed’s old bag of tricks, but as we’ve seen before buying back bonds from the free market does not successfully stimulate the economy.

Speaking of old bags of tricks, lets look at another one that’s equivalent to peeing in the ocean, which is to say that it adds liquid but doesn’t change the levels: stimulus money.

The Fed buys securities and the government provides stimulus money, right? The last round of stimulus money was effectively invested at 1/10th of 1% or used simply to pay down debt. In case I’m being obtuse in my exaggerated implications, I’m saying that people didn’t spend the money, and when they don’t spend money there is no economic spurring. Stimulus money is as effective as buying back securities . . . tinkling in the ocean, remember?

These are just old tricks that don’t work.

Everybody wants to see the economy jogged back into high gear (or gear?), but as the fed said yesterday, it would hold rates for two years. This acknowledges that we’re going to be in a funk of an economy for at least two years.

Rather than spending money buying back securities – old tricks – we need to cut spending in dramatic ways. For instance, end entitlement programs. Did you know that anyone who serves in Congress for any length of time gets health premium insurance forever? I ask again: Are you kidding me? We’re paying for this! This might also be peeing in the ocean but if we all relieve ourselves at once maybe the levels will change.

If the Fed wants to “spur” the economy, then we all need to be patient, tighten our belts, stop government spending, get out of debt and then be led by a solvent, healthy government that can make wise decisions for its people.

Honor the Month of April: Become Financially Aware & Reduce Stress

Last month was National Fraud Awareness month. This month is important, too. First, it’s Financial Literacy Month, and second – and I think quite complimentary – it’s Stress Awareness Month.

On top of both of these issues, April 18th is also Tax Day (yes, it’s usually April 15, but due to a Washington DC holiday, we can all enjoy an extra weekend to squirm over our taxes).

As you think about becoming aware of and learning to reduce your stress this month, I want you to also think about the role that finances have in your life – and your stress level.

Most people stress about their finances, and much of that stress, I believe, comes from a lack of awareness about their financial situation and where it’s going.

In business, if you don’t know where you are at every moment financially, you can’t move forward successfully in the long-term.

I think this also holds true in one’s personal affairs, and I have no doubt that with financial knowledge comes a reduction in stress – or, if finances are bad, at least the ability to predict and therefore manage that stress with greater ease.

In honor of both of these months – and taxes coming due – I encourage all of my readers and clients to do a few things this month, both in their businesses and their personal lives.

1. Make a budget or do some financial planning.

This need not be professional consulting with a financial manager (though that’s always nice). Just get a better understanding about how much you’re spending and on what you’re spending it. You never know which areas of your spending could easily be trimmed. Though you may not “need” the extra money you free up, it certainly could be nice to put it towards that vacation you were looking to take, right?

If you don’t know how to make a budget or you need some financial tips, consider financial magazines like Money (by CNN) or Kiplingers. If you are savvy with your financial management and awareness, make sure you’re passing these values along to your children (and/or employees) effectively. If you’re a business owner, consider offering a financial management and planning seminar for your employees.

2. Do something to de-stress yourself.

If you’ve already done your taxes, great, and even if you haven’t, reward yourself with something de-stressing afterwards like a massage, weekend trip or a day off. Becoming aware of our stress is the first step to reducing it, and with reduced stress comes a greater quality of life. Better financial knowledge and management almost always reduce stress.

What will you do to raise financial awareness in your life this month? What will you do to de-stress?