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Occupational Fraud: An Ounce of Prevention

March 19, 2013


A thief in the night is a frightening thought.  A thief in the light of day is pretty unsettling as well.  As a rule, most of us protect ourselves from the threat of theft.  We lock our homes and cars, activate our security systems, keep valuables out of sight, and generally maintain an awareness of who or what can do us harm.  Until we get to work, that is.

Theft on the job occurs at an alarming rate.  According to the Association of Certified Fraud Examiners 2012 Report to the Nations, small businesses suffer disproportionately when it comes to occupational fraud (defined by the ACFE as “the use of one’s occupation for personal enrichment through the deliberate misuse or misapplication of the employing organization’s resources”).  In the cases studied by the ACFE, median losses suffered by organizations employing fewer than 100 people amounted to $147,000, more than 85% of perpetrators had no prior criminal record, and the most common frauds involved check tampering and billing schemes.

As forensic accountants, we are often called in to investigate how and why perpetrators of occupational fraud found themselves in a position to commit a crime in the first place.  We are also often tasked with explaining to engaged, involved, dedicated business owners how they themselves enabled the criminals and unwittingly aided in the theft.

Means, Motive and Opportunity

Just like in the movies, we find that employees ultimately tempted to engage in criminal activity posses three basic elements: means, motive and opportunity.  In the context of occupational fraud, these elements have been recast as rationalization, perceived opportunity and pressure.  Pressure is often exerted by forces well beyond the walls of the workplace, and can be difficult to detect.  Rationalization is often directly correlated with the pressure under which the employee finds herself.  Or as Mark Twain said, “I find that principles have no real force except when one is well fed.”  That leaves opportunity as the single element over which an employer can exercise a measure of control.

What You Can Do

A discussion of the detail of a system of internal controls, including the control environment, IT environment and general computer controls, risk assessment, information and communication, monitoring and activity level controls can be enough to give even a seasoned CPA a headache.  But despite the sometimes overly technical and sophisticated sounding jargon, the concept of internal control boils down to two basic questions:  who has access to your cash, and are you paying attention to them?

It is a given that you will need to entrust employees with your cash.  It is how receivables are collected and bills are paid.  The key though, is to restrict the employee’s access to the record keeping aspect of the function for which they handle the cash.

For example, in the case of cash receipts, have the receptionist open the mail and collect the customer remittances.  Copies of the checks can then be forwarded to the accounting department to be processed.  The receptionist then prepares the deposit slip and makes the deposit.  You have just segregated duties, prevented the accounts receivable clerk from having access to a live customer check, and added a layer of protection.

In the case of cash disbursements, have the accounts payable clerk prepare the checks for signature.  Once reviewed and signed, have the payroll clerk stuff the envelopes and mail the checks.  Again, you have segregated duties, prevented the accounts payable clerk from having access to a live (signed) company check, and added a layer of protection.

Take the First Step

Consider who does what in your organization, and to what degree you have placed specific employees in a position to harm not only you, but themselves in the process.  Look for opportunities to reassign roles and responsibilities in a manner that does not create additional work, but segregates access to your cash from accounting for your cash.  Be creative and be involved.  You’ve placed locks on your doors, now place locks on your accounting system as well.

For more information please contact Matt Gutzwiller at [email protected] or at 513.241.3111.

All content provided in this article is for informational purposes only. Matters discussed in this article are subject to change. For up-to-date information on this subject please contact a Clark Schaefer Hackett professional. Clark Schaefer Hackett will not be held responsible for any claim, loss, damage or inconvenience caused as a result of any information within these pages or any information accessed through this site.


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