The number one way fraud is detected is via fellow employees. As much as 80% of reported fraud comes courtesy staff members. So the best way to detect fraud in your own business is through your own employees. They are out there in the field everyday so who would know better than them? Staying informed when you are the boss is tough, so try setting up an anonymous hotline or email account for submitting information. Let them know these hotlines are available and that there are no negative consequences for reporting fraud.
2. Ghost venders
One common fraud scheme involves setting up a fictitious vendor and bank account to pay oneself for services or supplies that were never received. So it may be a good idea to periodically audit your list of venders to see where your money is actually going. Beware of vendors that seem suspicious or out of place. If you have a large firm this may require an audit team.
3. Rouge Employees
Another common fraud scheme is the set up of fake employees. I once found a manager who set his spouse up as an employee and paid her for almost a year before anyone noticed. Beware of John Does on your payroll. Audit your employee master file and see who you have on staff these days.
4. Unusual Spending
A sudden boost in spending or a suspicious payment is often a red flag that something isn’t right. It’s often a good idea to use data analysis to analyze what your historical spending levels are compared to today. If there are unexplained variations you could have a problem on your hands. Also beware of large purchases or purchases from phony accounts and individuals. This kind of analysis may require certain software and expertise, but it can be very informative beyond just investigating fraud.
5. Excessive Voids
If your business handles a lot of cash there is a lot of opportunity and temptation for fraud. Often employees pocket cash and void purchases in the register to adjust the cash balance for the stolen money. Beware of excessive voiding of purchases.
6. Excessive Overtime
Overtime is an easy way for an employee to earn extra cash, especially if they aren’t really working. Beware of fictitious charging of hours by an employee. At very least too much overtime means you need to hire another employee or spread the responsibilities to reduce the labor burden.
7. Segregation of Duties
Most fraud can be prevented by the enforcement of segregation of duties. Segregation of duties simply means preventing any one individual from having too much power or “the keys to the kingdom”. A few examples include:
• Designating unique buyers and receivers to prevent someone from both purchasing and receiving items. It’s hard to steal what you never receive.
• Segregate the duties of entering and approving payroll entries to reduce the risk of fraudulent payroll payments.
• Preventing programmers from both designing and implementing their own source code to prevent the entry of malicious code.