By Gina Bianchi

Accountants play a crucial role in identifying, preventing, and mitigating the impact of fraudulent activity. While the current trend in fraud prevention focuses on cybersecurity threats and the impact of artificial intelligence (AI), this discussion delves into the nature of occupational fraud, the “OG” of fraud in the workplace, and the essential steps accountants can take to combat this prevalent threat.

Occupational fraud refers to the deliberate misuse or misapplication of an organization’s resources by its employees for personal gain. This type of fraud is particularly painful because it is committed by individuals within an organization who are often trusted with significant responsibilities. This fraud can include embezzlement of funds, theft of inventory or supplies, or payroll fraud, such as falsifying timesheets or creating ghost employees. Frauds can run from a manager misdirecting company checks for personal gain or creating false expense reports to more complex forms of corruption and financial statement fraud. This blog focuses only on asset misappropriation.

The Company Structure

Most smaller companies don’t have the staffing levels and more structured control processes of larger businesses. In fact, in many small and medium-size companies we have seen there is one person who handles the mail, adds up the checks, verifies accounts receivable, and deposits checks. Or, they might have separate processes for certain accounting and banking functions, but they never communicate with one another so there are no checks and balances. These are never good signs and could greatly increase the risk of fraud in the workplace.

Suggested Solutions

For small businesses, installing sufficient internal control processes and procedures that ensure the integrity of reporting, efficient operations, and the safety of assets can be a challenge. However, strong internal controls can reduce the risk of fraud in various ways, including segregation of duties, authorization controls, and frequent reconciliation procedures. For example, if a company segregates accounting and banking duties among different employees, uses lockboxes for payments, requires dual control over cash receipts and recording them, and performs regular reconciliations of bank deposits to accounts receivable records, even a smaller enterprise can achieve much in mitigating risk. Also, consider employing automated systems for payment processing and have independent reviews to further reduce fraud risk.

Sign-in sheets, too, can help mitigate fraud by providing a clear record of who accessed specific areas, who handled financial documents, and who used company assets like trucks or pieces of equipment. If employees sign in and out – noting the date, time, and purpose of their visit – when a discrepancy arises, the sign-in sheet helps identify who accessed an area.

Regular reviews of the sign-in sheets by a supervisor or an internal auditor may also help detect unusual patterns, such as unauthorized access or repeated visits by individuals without a clear business need. This proactive monitoring adds a layer of accountability and deters employees from attempting fraudulent activities. It also cost little or nothing extra.

Establishing clear and well-defined reporting lines within the accounting department of a small business can significantly help mitigate fraud by ensuring accountability, oversight, and proper segregation of duties. In smaller businesses, accounting departments don’t always have clearly defined reporting lines where each employee knows to whom they report and who is responsible for overseeing their work. Instituting an establish process and reporting line removes any excuse from fraudsters that “they did not know” that they had to report to someone in some way.

Let’s say a business has a process for handling vendor payments where the accounting clerk prepares payment vouchers, the senior accountant reviews and approves the vouchers, and the accounting manager authorizes the final payment. Each step in the process involves a different level of oversight:

• The accounting clerk prepares payment vouchers based on received invoices and enters them into the accounting system.
• The senior accountant reviews the prepared vouchers to ensure they are accurate, verifying that the goods or services have been received, and match the purchase order.
• The accounting manager authorizes final payment, ensuring the senior accountant's review is thorough and all documentation is complete.
• The CFO periodically reviews a sample of payments and reconciles them with bank statements and financial reports, providing an additional layer of oversight.

With these reporting lines, each person in the chain has a clear role and responsibility, reducing the chance for any single individual to commit and conceal fraudulent activity. The checks and balances at each level create a system where errors or fraudulent actions are more likely to be detected and addressed promptly.

Additionally, by having the CFO report directly to the owner/CEO, there is an independent review of financial activities, further deterring fraudulent behavior because employees know there is continuous and hierarchical oversight. In modest-sized companies, we sometimes see one person serve in all the roles noted above – the office manager has a stack of invoices to pay on their desk along with the owner’s bank stamp. There is little to prevent the payment of personal invoices or creating ghost payees.

When it comes to owners receiving bank statements directly, this requires implementing additional controls and verification processes. This can be done in a few ways.

Independent Bank Reconciliation – Ensure bank reconciliations are performed by someone other than the person who handles cash transactions. This person should not have any other involvement in the cash-handling process. The reconciler should compare the bank statements directly from the bank to the company's internal records and flag any discrepancies.

Direct Receipt of Bank Statements – Have the bank send statements directly to the owner’s home or to a secure email that only the owner can access. Alternatively, the owner can log into the bank’s online portal to view statements directly.

Dual Review of Bank Statements – The owner should perform an initial review of bank statements to look for any unusual transactions or patterns that could indicate fraud. After the owner’s review, a second independent person such as an external accountant or auditor should also review the statements to ensure accuracy and completeness.

Utilize Bank Alerts – Set up bank alerts for withdrawals, transfers, or deposits above a certain threshold. These alerts can be sent to the owner, providing real-time monitoring of account activity.

Digital Verification – Use bank-provided digital tools and secure online banking systems to reduce the risk of statement manipulation. Encourage the use of read-only access to online banking for verification purposes.

Random Audits – Conduct random audits of bank statements and reconciliations. These audits should be performed by either the owner or an external auditor to ensure ongoing oversight and deter potential fraud. This can be a very effective tool if accounting departments know they can be audited at any time.

Fraud Prevention

Even smaller companies can take commonsense, low-cost actions to build a culture of professional ethics and an acceptable code of conduct that creates an environment that is not conducive to fraud. But to prevent occupational fraud, you need a proactive and comprehensive approach.

A Clear Code of Conduct – Organizations should promote ethical behavior at all levels and ensure that employees understand the consequences of fraudulent activities. This can be achieved through a clear code of conduct that outlines expected behaviors and ethical standards by providing regular training to employees on ethical issues and fraud prevention.

Training and Awareness – Provide regular training for employees on recognizing and reporting suspicious activities. Ongoing training and awareness programs keep employees informed about the latest fraud schemes and prevention techniques. Training materials and workshops will educate employees about their role in preventing fraud. Many outside companies can provide these services at a moderate cost.

Conducting Fraud Risk Assessments – This step can help identify vulnerabilities within an organization. This involves evaluating the likelihood and potential impact of various fraud schemes and recommending appropriate mitigation strategies.

Making an Example of Those Who Commit Fraud – Despite best efforts, fraud may still occur. When suspected, an investigation is vital. Not only will it assess the extent and identify the perpetrators, it also will reveal weak spots in the company. If fraud is confirmed, efforts should focus on recovering losses through legal action, insurance claims, or restitution. Some businesses make a decision to look the other way so as not to draw negative attention to the company, but it really is more important to create an environment in which fraud will not be tolerated. No matter how small it might be, there will be consequences. Post-incident, it’s essential to review and strengthen internal controls, revise policies, implement additional controls, and enhance monitoring to prevent future occurrences.

Trust is the currency of every organization, so we all must remain vigilant and proactive to ensure honesty and integrity are never compromised. Safeguarding the workplace from occupational fraud can be done with good planning and commonsense procedures, often at a low cost. The benefits are not only a reduction of the risk of fraud, but also a stronger, more vibrant organization.

Gina Bianchi is a consultant with JS Held’s economic damages and valuation services office in Westmont, N.J. Bianchi can be reached at Gina.Bianchi@jsheld.com.

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^{Statements of fact and opinion are the authors’ responsibility alone and do not imply an opinion on the part of the PICPA's officers or members. The information contained herein does not constitute accounting, legal, or professional advice. For actionable advice, you must engage or consult with a qualified professional.}