Detecting Fraud: When Good Employees Go Bad

by James Marasco , CPA, CFE, CIA
Director, Corporate Services
StoneBridge Business Partners

Reprinted with permission from Fraud Matters Newsletter of CPA America.

It can happen anywhere. Where pressures and opportunities exist, individuals may very well commit fraud against their employer. And, according to the Association of Certified Fraud Examiners, after their acts are perpetrated, they will rationalize their actions to themselves and others.

Even the most trustworthy of employees can succumb to pressures. Stock market losses, a spouse’s disability, college tuition and unexpected expenditures can all lead to unavoidable pressures on your employees.

Weak internal controls or vulnerabilities in your organization may offer the opportunity for an employee to commit fraud. If you suspect someone has crossed the line, it’s time to go into detection mode. Here are some areas you can examine.

Check the Cash

  • Examine your bank statements and cancelled checks. Were reconciliations performed in a timely manner and reviewed by someone?
  • Are any unusual adjustments or reconciling items present on the statements?
  • Compare the cancelled checks with those listed on the statement. Were any removed or altered?
  • Do any payees or addresses look suspect?
  • Examine transfers and debits on bank statements. Are they appropriate? Can you identify them?
  • Have all credit memos been issued, examined and reviewed by an independent party?
  • Do refunds being made have adequate support and proper documentation?
  • Perform your own test of integrity - mail some cash into your organization on behalf of someone’s account. Does it get credited properly?
  • Run an active vendor listing off your payable system. Examine all P.O. Box addresses carefully. Do any suspicious names or employee names appear? If so, run an activity report of all disbursements made to them.
  • Perform a surprise petty cash count. Do receipts for disbursements exist and is the cash accounted for properly?


Inventory

  • Do you perform unannounced inventory counts of your higher priced products and reconcile the quantity to perpetual reports?
  • Examine receiving logs. Are shipments being logged in correctly and examined for completeness upon receipt?
  • Are shipments that leave your dock safeguarded adequately against pilferage by the drivers?


Payroll and Expense Reports

  • Review the payroll records and reporting for all those who have access to the payroll processing system. Do they look reasonable?
  • Check the quarterly payroll reports – are there any suspicious or “ghost” employees?
  • Examine payroll records for employees with no withholdings or P.O. Box addresses. Are they legitimate?
  • Do overtime hours and pay appear excessive?
  • Are all expense reports approved by an independent party?
  • Examine the expense reports of those who have approval responsibility. Are reports adequately substantiated with original documentation?
  • Are the items being reimbursed appropriate, and do they meet your organizational guidelines?
  • If you have corporate charge cards, request a credit activity report from the issuer and review the activity against individuals’ expense reports. Is this activity being captured on their reports? Are they seeking reimbursement for items already charged to the organization?


Fixed Assets and Equipment

  • Is your equipment tagged, inventoried and accounted for?
  • Perform a reconciliation of your current listings against what’s on hand. Is there anything missing? Can you narrow down who has access to it?


Information Technology and Accounting System

  • Does your organization have the ability to track who logs into your network and when?
  • Can you trace where employees have gone on the network or Internet?
  • Try to determine what files are being downloaded onto their machines. Are their actions appropriate?
  • Can individuals who have access to your accounting system modify or alter previously recorded journal entries or check payees within the system? Check to ensure that entries being made at the end of each month make sense and are not being made to mask fraudulent actions of an employee.


Call for help

If, through your investigation, you find your organization may have been compromised in some way, contact us . Chances are that a perpetrator may have found and exploited other weaknesses in your system.

You need to safeguard the organization from future losses and quantify your current exposure. Our experience can help guide you through this process. 

James I. Marasco, CPA/CFF, CFE, CIA
Jim is a partner at EFP Rotenberg. He brings more than 18 years of public accounting and auditing experience. He is a full-time management consultant and travels extensively throughout the country while leading StoneBridge Business Partners (an EFP Rotenberg affiliate company). Read more about Jim . Article republished with the permission of CPAmerica.