Year end is an ideal time for businesses to tie off loose ends – and this includes assessing their fraud controls. A system that may have been effective five years ago when a restaurant chain had only one location or a company manufactured a single product may not meet the organization’s changing needs or address the risks associated with expansion.
For many companies, business slows down after the holidays. Therefore, take advantage of this downtime to conduct a year-end fraud sweep with the help of a forensic accounting expert.
There are hundreds of ways to commit fraud, and the signs aren’t always obvious. A thorough, objective review performed by an expert can unveil suspicious losses that may indicate fraud. It also can identify internal control weaknesses that may leave a business vulnerable to fraud perpetrators.
Among the documents a fraud expert will examine are:
• Bookkeeping records.
• Bank statements.
• Journal entries.
• Financial reports.
Management can assist by ensuring easy access to records and personnel and should pay attention to how long it takes employees to produce documents. If some records are missing, management needs to ask why and what steps employees took to find them. Documents that can’t be located are a red flag for fraud.
Experts typically look for signs of doctored, forged or missing documents or anything that doesn’t “feel right.” For example, an unusual number of journal entries posted near the end of the fiscal year could be adjustments made to cover theft or misappropriation.
Adjustments to receivables and payables are possible signs that employees are misappropriating customer payments or engaging in billing schemes. Another red flag is out-of-balance books. An end-of-year inventory of merchandise or cash can bring missing assets to light.
Experts pay particular attention to payroll documents. Missing or otherwise unaccounted for employees could indicate the presence of “ghost” employees. Management can help to expose such schemes
– in which perpetrators pay nonexistent staff members – by personally handing out year-end paychecks or bonuses (or paper stubs if employees have their checks direct deposited). Any leftover checks merit further investigation.
Management also should observe employee behavior. Fraud perpetrators often avoid taking vacation or sick time for fear someone will uncover their activities in their absence. And thieves may seem irritable or defensive when asked to comply with an organized fraud sweep.
If something appears suspicious, businesses must be willing to confront it – and resist the temptation to explain away exceptions. Also, if an employee is caught, management
shouldn’t assume that this employee is the only culprit. Unfortunately, fraud schemes often involve more than one person. And fraud can be committed by people outside the company or by a combination of employees and outsiders.
But warning signs don’t always lead to a thief. Accounting irregularities may be explained by genuine errors or an ill-designed process. Honest mistakes can be corrected and avoided in the future with better training, process improvements or the addition of more-effective controls.
If a company hasn’t already established a system for employees, vendors, customers and the public to report suspicious activities, it should do so. While not required of private companies as they are of public ones, confidential hotlines can cut fraud losses by approximately 50 percent per scheme, according to the Association of Certified Fraud Examiners.
Year-end fraud sweeps enable businesses to close the books on the old year and welcome the new one with confidence. Although management can provide valuable information and assistance, it should hire an experienced, certified fraud expert to conduct the actual review.
Stephanie Stohon is a certified public accountant at Wessel & Co.