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  It’s not an outdated concept.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.

FRAUD & THE CONTROLLER – PART III

Hope all of you survived Thanksgiving & Black Friday.  Today is cyber-Monday.  I am trying to resist.

I hope you had the chance to read last week’s blog about ‘The Spy’ at the EPA.  If you haven’t, I urge you to take time to read it.  The level of incompetence of those responsible for our taxpayer dollars at the EPA is almost incomprehensible.

Why do people commit fraud against their employers?  According to the ACFE’s 2012 Report to the Nation on Fraud, here are a few of them:

  • Financial pressures
  • Need to live beyond their means (social pressure)
  • Addictions
  • Marital instability

After reading the Wall Street Journal article, I think we can add one more – delusions of grandiosity.  I’ve met a few people in my career that suffered from this particular malady.  They can be very dangerous in some organizations.

Here are some frauds I have encountered during my career:

  • Plant manager buying an engine for a race car he was building
  • Retail manager buying groceries and building supplies on his company checkbook
  • Secretary endorsing over and depositing to her account a vendor refund check made out to the company
  • Salesman collecting cash from customers for invoice payments and failing to turn it in
  • Salesman turned in hand written tickets for gasoline purchases he never made
  • Traffic manager taking kickbacks from a vendor

The most frightening statistic in the report reflects that approximately 5% of all business revenue is lost to fraud.  What are we as controllers and cfo’s and consultants going to do about this?

I subscribe to the Wall Street Journal in order to stay on top of business trends and developments.  It’s never boring.  There is hardly a day that goes by that there is not a report of fraud by individuals or an organization.  I’ve lived in a third world country where the citizens were just resigned to fraud and waste.  I do not want to see that happen to the United States.

I’m going to give you a link to the ACFE report.  On page 70 & 71 is a “Fraud Prevention Checklist’.  Print it, review it and then grade yourself and your organization

Next week we will delve into the Checklist.

ACFE 2012 Report to the Nation

FRAUD & THE CONTROLLER – PART II

Here’s my Thanksgiving gift to all controllers and consultants.  Yes, it’s about fraud.  A fraud so outrageous that I had to write about it.

Tucked in the bottom corner of the Editorial Page of the Wall Street Journal last week was an article titled ” The ‘Spy’ Who Fooled the EPA”.  If your faith in our government has been diminishing, I’m afraid this might be the final nail in the coffin.

It happened at the Office of Air and Radiation, a division of the EPA.  John C. Beale was a senior official there having spent 23 years of his career there.  Recently, he reached a plea agreement related to the $900,000 in overpayments of a bonus and falsified expenses.  Apparently the fraud started in 1989, even before he was hired.  On his application for employment he stated that he had been employed in the U.S. Senate.  There is no evidence of that being true.  After hiring, he informed his superiors that he was also working as an operative of the CIA.  It only gets better.  Prosecutors contended he had missed almost 2 1/2 years of work from 2000 to 2013 telling his superiors he was essentially gone on ‘secret missions’.  In fact, in 2008 he was gone for six months supposedly on an EPA ‘research’ project.  No leave request was ever submitted.  But, the EPA managed to approve and reimburse him for $57,000 in fraudulent travel expenses.  It gets even better than that.  He also claimed he had contracted malaria while serving in Vietnam.  His prize, an $18,000 handicapped parking spot in downtown Washington D.C.  P.S.: there’s no evidence he ever served in Vietnam.  Nor, any evidence that he had malaria.  For his stellar performance as an employee, he was awarded retention bonuses for six consecutive years.  Just one problem.  The EPA paid those bonuses for 23 consecutive years.  Louisiana Senator David Vitter spearheaded an investigation that led to the facts of the gross overpayments becoming known.  Senator Vitter is pushing for an investigation of the INTERNAL CONTROLS at the EPA.  However, Senator Barbara Boxer, head of the Environment & Public Works committee is resisting.  Why?  The writer states it may be because this is just too embarrassing for the EPA.

I wonder, have you had an employee tell you they would be absent for awhile because they are a CIA operative?  Or working on a secret project for your own company?  What about an employee that asks for time off at a busy time of year because they have personal issues?  And then you find out they needed the time to recover from cosmetic surgery?  Everyone is entitled to time off. It’s just there needs to be a recognition that there are times when they are needed.  Would Santa be giving the elves time off right about now?  The WSJ article is really not about the appropriate times to ask for leave.  Rather, it is about why the government can’t do any better than this protecting our taxpayer dollars?  And, what about all the stealing going on that we don’t know about.

Have a Happy and Safe Thanksgiving to all of you.  See you next Monday.  Part III of FRAUD & THE CONTROLLER.

FRAUD & THE CONTROLLER

For CPA’s and audit firms, there’s been a major disagreement going on for years as to whether or not in an audit or review, fraud should be detected.  Most investors have always assumed that it was the accountant’s main objective to discover fraud.  However, determining whether there are material misstatements in the financial statements is not the same thing as detecting fraud.  That said, I believe that a controller has the very clear responsibility to implement controls to prevent fraud.  I can think of nothing worse than to have a major fraud discovered in a company with a controller.  There are exceptions.  Mainly, the one exception I see is if it is fraud by management overriding controls.  That’s difficult for a controller to detect unless they have observed it first hand.

Fraud comes in all shapes and sizes.  Would you believe that churches are repeatedly victims of fraud.  Here are some of the fraud schemes we will look at in the coming weeks.

  • Invoicing Schemes
  • Checkbook schemes
  • Accounts Payable schemes
  • Payroll Schemes (ghost employees)

We’ll also look at ‘Report to the Nations on Occupational Fraud & Abuse’ 2012 Global Fraud Study.  Some of the statistics are actually quite sobering.  Did you know that:

  • 77% of all frauds are committed by personnel in Accounting, Operations, Sales, Executive/Upper Management, Customer Service & Purchasing.  Six departments all who have some degree of control over cash.  And some, more than others.
  •   In the U.S. 43.1% of discovered cases of fraud were through tips.
  • 87% of all occupational fraudsters are first time offenders.
  • Occupational Fraud is a significant threat to small business
  • The median loss was $140,000 with 1/5th involving $1,000,000+.
  • Companies in 2012 with less than 100 employees averaged more in dollar losses ($147,000) than companies with over 10,000 employees ($140,000)

(All of the above taken from ‘Report to the Nations)

After spending several hours the other night researching cases on the FBI website, I can tell you that after a while there is a pattern that emerges that even the non-accountant can easily perceive.  When it comes to their money, too many business owners just had to be asleep at the wheel for some of these frauds to be perpetuated.

If you are working as a controller, the owner(s) of your company has most likely already realized the need for your services.  As a controller, you must keep your eye on much more than accounting, inventory, accounts payable, general ledger and all the other things that demand our time.

In future articles we’ll look at some steps to take to start building a strong foundation of internal controls, especially over cash.

RULE Number ONE on the list.  CROSS TRAINING.  I promise you, most likely you will get resistance.  Use your imagination on this one if you have to.  No bookkeeper in a business should be the only person who can handle the deposits and the disbursements.  Finally, I think the statistic still stands………………one in four employees steal from their companies.  It’s time to pay attention if you haven’t been. 

Think Like a Consultant! “How to Streamline Your Company from the Inside” – Part III

As we move into Part III, it’s time to follow up on the ‘scenarios’ presented in Part II.  We presented two different scenarios in which the Controller reported back to the owner his/her findings on two fairly significant (at least to the owner) mistakes that occurred.  In both cases, the Controller gained understanding of how these events happened.  However, there was no INVESTIGATION!  The controller did not ask ‘Why’ (or, how did this happen and what can we do to prevent this from happening again?)  I would want to insure it wouldn’t happen again, just to prevent the pain and embarrassment of events like this that fell under my watch.  with that said, let’s explore Scenario I.

As you will recall, in Scenario I, the company paid the same bill twice resulting in a duplicate payment of $100,000.  Based on the annual earnings of the company, this was a material event.  In fact, the $100,000 was to pay for a capital investment.  It’s time to have a meeting which includes your purchasing agent/employee and your Accounts Payable Department.   Does your company have a documented Capital Expenditures process?  A good process includes a ‘Faceplate’ that includes the justification for the expenditure, what division the expenditure is for, as well as signature lines for top management/owner(s).  Once the sheet is approved, it should be returned to the Purchasing Manager.  At that time, a P.O. should be written.  If the P.O. is electronically generated, a copy should be marked as the ‘Payment Copy’ (in the absence of a software solution provided for tracking these kind of payments).  In the case of a manual P.O. from a P.O. book, it should be policy as to which copy is attached to the Vendor invoice.  It should be the policy that when the vendor invoice is received it should be routed to the Purchasing Manager who checks it for accuracy against the P.O. and attachs the payment company.  Policy would prevent the creation of additional payment copies which would flag when a duplicate invoice was presented.  As the Controller, it should be your responsibility to insure that invoices of any amount are not paid twice.  It is one thing to pay a $75.00 invoice twice and quite another to pay a $100,000 invoice twice.  It may be necessary to have some different policies in Accounts Payable based on the amount of vendor invoices. Before you develop or change any policy or procedure, you should always get input from the employees in Purchasing and Accounts Payable.  Feedback and input is critical to creating an efficient and streamlined organization.  It doesn’t mean you have to act on every idea or concern however, you need to hear them.

DIAGNOSIS:  Either you had no policy in place, with procedures for handling payments of capital expenditures or they were not followed.

In Scenario II, there were numerous violations of policy and internal control procedures.  However, that said, as the Controller, you need to know that people who want to steal or mishandle assets will always be a part of the equation.  They are the ones that have no respect for rules, policies and management authority.  Therefore, there must be ways to monitor constantly by keeping a close watch on your inventory assets (or your cash).  Scenario II involves missing inventory.  The manager was put on probation and one would hope someone in HR or Management will monitor the employee.  Where do you as controller fit in?  It’s time for a meeting.  You have a problem with your Inventory team.  Not everyone on a count team is trained to conduct inventories so as to reveal cover ups.  In Scenario II, the count team took the word of the manager and essentially aided in falsifying the inventory.  I am not saying they were complicit, which generally they are not.  Simply  uneducated in why, when confronted with a manager asking them to write down a number on the physical inventory count sheet representing product they cannot see, they should call you.  Therefore, the weak link is really the count team.   Meet with all persons that participate in inventory audits and review the event.  Talk about how important it is to report a problem with an inventory count.  Also, emphasize that their notes about any ‘outside the norm’ counts are so important.

DIAGNOSIS:  Your count team had a lack of training to prepare them for handling the events described in Scenario II.

DOCUMENTATION REQUIREMENTS:

SCENARIO I:

Before you begin developing forms/checklists, you have to begin with a written policy.  If you’re looking for help on how to do this, enter Capital Spending Policy or Capital Expenditures Policy into your favorite search engine (Google, Bing, etc.).  You should find plenty of ideas.  If you need some help with this, just leave a comment.

SCENARIO II:

Your count teams need the following:  Written policy on how they will plan and execute the physical inventory.  A printed worksheet listing the products at a given location.  Sheets to attach notes, drawings, etc.  A Physical Inventory CUTOFF Worksheet.  There should always be a count team leader responsible for collecting all the information.  Please note that the Physical Inventory CUTOFF Worksheet should reflect cutoff numbers of invoices, receiving documents, credit memos, etc.  It should also be signed by the Location manager as well as the Count Team Leader.

Again, you can probably find some of these by using a search engine.

REFERENCEThe Accounting Procedures Guidebook by Steven Bragg covers almost every subject a Controller will be exposed to.  In addition, he has some wonderful forms peppered throughout the guidebook.  You should be able to find everything you need to know in his Chapters on Inventory and Capital spending.  I’ve read every page as a result of purchasing it through CPE Link for a self-study course to earn CPE’s.  It reads like a consultant’s guidebook.

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