Detecting Fraud in Your Organization

Eight simple tactics for catching a thief.

September 4, 2008
by Mary Schaeffer

No one likes to think their employees will steal from them. But the fact remains that the most likely culprit is one of your long-term, trusted employees. Most accounting professionals will experience fraud in their organizations at some point in their careers. Some will be unfortunate enough to have it happen more than once. While it is never possible to completely eliminate fraud, there are best practice strategies that your organization can put in place to detect it early before it gets out of hand.

Eight Best Practice Tips

Here are eight techniques your company can use to uncover fraud:

  1. Install an anonymous hotline. A hotline provides a mechanism for employees to report something that doesn’t look right without getting personally involved. The Association of Certified Fraud Examiners (ACFE) reports that over one-third of all frauds are uncovered by a tip. Sure, some discontented staff member may use the hotline to cause trouble for another employee, but the odds are high a good portion of those tips will be legit. An even better reason to have this installed is to lower your losses when a fraud does occur.
  2. Surprise audits. The internal audit function should have the authority to go in and audit any group without advance notice. This could be in reaction to an anonymous tip or as part of its regular rotation. This is especially important whenever cash is involved, as in petty cash box.
  3. Run your employees’ addresses against the address file of your vendors in the master vendor file. Any matches should be investigated. There are legitimate reasons why there may be a match, but generally these are limited. Make sure you make adjustments if your traveling employees are included in the master vendor file.
  4. Create a Changes to the Master Vendor File Report and have it reviewed by a senior executive. It should be run periodically as appropriate for your activity, either weekly or monthly. Its purpose is to identify any unusual or potentially fraudulent activity.
  5. Do background checks on any employee handling money. Someone who has committed fraud before is likely to repeat it, especially if the individual is having personal financial difficulty.
  6. Vendor applications should be required and reviewed in accounts payable or somewhere outside the department recommending the new vendor. The review can be cursory; simply checking to make sure the vendor exists on public records is a control to ensure an employee isn’t setting up a fraudulent vendor.
  7. Employ the “eyeball test” when it comes to reviewing data. Train your employees to take a step back and look at the data objectively. Does it make sense?
  8. Set up responsibilities employing appropriate segregation of duties. Sometimes when a new function or process is put in place, the segregation issue is completely overlooked. Occasionally, a company employs perfect segregation of duties and then ruins it by giving one person access to everything — usually a manager responsible for the function.  

While it would be ideal prevent fraud entirely, the best thing a manager can do is to uncover it before the fraudster gets too far along in the game. The goal of these tactics is to help your organization do just that.

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Mary S. Schaeffer is the author of over a dozen business books including The Controller and CFO’s Guide to Accounts Payable (2007 John Wiley & Sons) and the just-published  Fraud in Accounts Payable: How to Prevent It. She serves as the editorial director of Accounts Payable Now & Tomorrow, a newsletter for professionals interested in payment issues, writes a free weekly ezine e-AP News and directs the organization’s consulting practice. You can read her thoughts on timely payment issues on the AP Now blog.