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It Could Not Happen Here!
Do not kid yourself. Employee fraud can happen anywhere.

Surveys indicate fraud costs U.S. companies more than $400 billion a year. Every organization, small or large, is at risk for significant financial loss through employee fraud. You would like to trust everyone who works for you. But it also is increasingly important to have improved internal controls to help prevent fraud from occurring, in case your trust is betrayed.

Employee fraud can occur at different levels, and initially, it can be difficult to spot. Many employees who steal from their employer have personal financial pressures from living beyond their means, or they may be supporting various types of addictions. Employee fraud can be committed by anyone in an organization. However, the level of employee involved may determine how quickly it is discovered.

Fraudulent acts committed by the officers of a company may go unnoticed for a longer period of time. That's becuase officers frequently have substantial authority and control, with little or no oversight by others. Therefore, they're less likely to be questioned. This is especially true when the officer is a trusted individual possibly even a co-owner.

Conversely, fraud committed by junior-level employees should be more easily detected because of the various checks and balances of each transaction. Too often, it remains unnoticed because this level of employee frequently starts with small dollar amounts. Even with internal controls in place, the employee may not be detected until the amount of theft increases, or the fraud is discovered by accident.

The following are two actual cases. The first involved an officer; the second involved a junior employee.

In the first case, the chief financial officer (CFO) of an organization, who at the time was also acting as the chief executive office (CEO), purchased business items using the company credit card. He also listed the same purchases on his individual expense reports, effectively double-billing the company and pocketing the improper reimbursements.

This situation clearly demonstrates the need for segregation of duties. As soon as the new CEO was hired to oversee all financial transactions, the fraud was detected. The soon-to-be former-CFO admitted making the transactions and made full restitution, while the Board considered criminal prosecution.

In the second case, a trusted employee at a construction company manually increased vendor invoice amounts. The employee then arranged for most of the overpaid amounts to be rebated as consulting fees to a fictitious entity that he controlled. In return, the vendors received major contracts with the company, and were paid a premium for the services and product they provided. The dishonest employee took advantage of several internal control weaknesses including the authorized check signer did not compare the check amounts to the underlying invoices and no one monitored the budget to actual overruns. After completing a forensic accounting investigation, the former employee was prosecuted. He received a prison sentence and a court order to pay restitution. The vendors were pursued civilly, resulting in substantial monetary recoveries to the construction company.

Five simple steps you should consider now

As these cases clearly demonstrate, even the most trusted employees need to be monitored. In priority order, here is what you should consider to reduce the risk of employee fraud:

1. Make everyone accountable to someone. This includes requiring the manager and accounting officer to oversee each otherÕs transactions. In a larger company, this may be the CEO and CFO.

2. Implement internal and/or external audits if not already in place.

3. If audits are too costly, the owner/manager may need to take responsibility for overseeing cash and asset management. However, the cost of an outside professionalÕs time may be worth it, since he or she can quickly spot weaknesses in your control system.

4. Offer training courses in fraud prevention and detection to all employees.

5. Create a written corporate policy and compliance manual that all employees must understand and follow. Just knowing one is in place can be a deterrent in itself.

John L. Pund, Jr., CPA, Esq., is a principal and Mari Knabel is a senior associate with Parente Randolph, a regional CPA and consulting firm. They can be contacted at (215) 972-0714.

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