FRAUD & THE CONTROLLER – PART IV

Good morning Controllers.  In my post last week, we talked about the ACFE’s 2012 REPORT TO THE NATION on OCCUPATIONAL FRAUD & ABUSE.

In Part IV, my final post specifically dedicated to prevention of fraud, I said we would visit the checklist included in the Report to the Nation.  Hopefully you were able to follow the link and look at it.  Let’s look at a few of the questions:

  • Is the Management climate/tone at the top one of honesty and integrity.
  • Does Internal Audit have adequate resources and authority to operate effectively and without undue influence from senior management?
  • Are strong anti-fraud controls in place and operating effectively?
  • Does the hiring policy (where permitted by law) include
    • Past employment verification
    • Criminal and civil background checks
    • Credit checks
    • Drug Screening
    • Education verification
    • References check

There were eleven separate questions but I listed the ones I thought were the most critical rather than repeating them all (but I still urge you to follow the link and print the checklist for yourself).

Just looking at the four above, I can’t overstate the importance of ‘due diligence’ in hiring, especially when it comes to accounting, finance, accounts receivable, accounts payable, treasury, sales, operations, etc.  Doing so is not a 100% bona fide guarantee you won’t make a hiring mistake, but it will certainly eliminate a significant number of bad hires.  Any time you can be proactive and not reactive, you are well ahead of the curve.  Finally, firing someone, at least for me, is gut wrenching.  Save yourself some pain.

Next, ‘tone at the top’.  I remember this kind of question on my CPA exam.  It’s not an outdated concept.  Yes, there are some successful executives who have ignored the importance of ‘tone at the top’.  But when you ignore it, you risk losing it all.  As a controller, there’s very little you can do about this if senior management is unconcerned.  As controller you can set your own tone with your people about honesty and integrity.  At least they will know where you stand.

Next, anti-fraud measures are critical.  To often as we all learned in accounting 101, segregation of duties is not possible because of the number of employees.  If you are a small company, this is a challenge.  However, as I have said, you do not want the bookkeeper reconciling the bank statement.  Do whatever you have to do to keep that from happening.  And remember that cross training, wherever possible is a significant step towards strengthening your internal control.

Internal Audit departments are generally the province of big companies.  It may be that as controller, you will have to become the Internal Auditor.  If your company uses an outside accounting firm, get with them and have them assist you in developing the internal audit questionnaire.

Fraud prevention does not have to be an expensive proposition.  There is much you can do to have fairly tight controls in place without a big dollar investment.  However, fraud losses can be very expensive, especially in smaller companies.  According to the ACFE report, average losses for small to medium companies from fraud:

  • 2012 – $200,000
  • 2010 – $231,000
  • 2008 – $278,000

Note:  At least the averages are declining.

One last story, and then we will move on.  In our small town there’s not much choice among grocery stores.  However, there was a small independently owned grocery store that I loved.  They bought produce locally and you could buy exotic lettuces and beautiful herbs there.  They had good prices and many individuals and companies did business there.  He also had a very lucrative meat business.  But they closed their doors a couple of years ago.  All of us were heartbroken.  The owner went broke.  But I found out, through a confidential informant, that the ditzy little blonde cashier that had worked there after school for about five years (and then fulltime) had stolen almost $500,000 from the cash register through phony refunds and other manipulations.  To this day, I don’t know how that was possible, but sadly it happens everyday somewhere in America.  Somewhere in the world.  Be an advocate for your company and protect it as if it were your own.  Your job may depend on it.

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