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Internal Fraud: How to protect your company

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You don’t want to believe it. But the numbers just aren’t adding up. You want to trust the people who work for you, but eventually you have to come to terms with the fact that someone in your company is stealing money. Not only does it hurt your business, but it’s often a heartbreaking realization for you as a manager or owner.

It’s not always easy to figure out who is the culprit, but there are steps you can take to detect and hopefully prevent fraud within your company.

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Dual control and separation of duties

Understand who is in charge of what financial responsibilities and make sure there are no gaps. Create a system of checks and balances so that the same person who is running payables (bills, invoices, expense reports) isn’t the same person who is reconciling the accounts (balancing the company checkbook, so to speak).

It’s also a good idea for business owners to review financial statements on a weekly or monthly basis.

Automated fraud detection

Consider implementing Positive Pay. This automated fraud detection tool is offered by most banks. It’s a relatively simple process. Your company issues checks every month and you send the bank a list of all those checks, including check numbers, amounts and payees. The bank makes sure the checks match up as each one clears. This eliminates any fraudulent or altered checks. Automated fraud detection is a great solution for companies as long as they already have dual controls in place.

Anonymous tip line

Businesses should also consider setting up an anonymous fraud tip line. Internal fraud is most often detected by a tip from another associate. As a business owner or manager, you can’t know everything that’s going on in your company. Giving your associates an anonymous way to notify you is a simple, effective way to detect internal fraud.

Other processes and procedures to consider:

  • Reputable third-party audits
  • Periodic reviews of policies, procedures and controls
  • Diversity of associates’ job functions, including rotation of job duties at times
  • Periodic spot checks of your account payables/receivables, payroll, etc.

Don’t think it will happen to you? Keep this in mind. 61 percent of financial professionals reported that their organization experienced attempted or actual payments fraud in 2012. And 26 percent of fraud is committed by an organization’s own associates (Source: Association for Financial Professionals). Even though you want to assume the best from your associates, you should have systems in place to ensure that you don’t become another internal fraud statistic.

 

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Mr. Bibens is a treasury management officer for UMB’s Commercial Deposits department. He is responsible for providing consultative technology and cash flow management solutions to companies and public entities throughout the Greater Missouri area. He joined UMB in 2010 and has 10 years of experience in the financial services industry.

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Internal fraud: Who they are and why they do it

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He looks like a typical associate. She could be a 20-something or a person in her fifties. He could be the person you eat lunch with every day. The truth is that you can’t pick out this person from the crowd. She is committing internal fraud in your company and doesn’t look any different from the rest of your co-workers. He makes sure he blends in.

So what should you look for if you suspect one of your associates is committing fraud?

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What to look for

  • A disgruntled associate who is vocal about their unhappiness with the company. They often use this as an excuse to commit fraud.
  • An overly enthusiastic associate who consistently ask questions about processes and procedures that will help them steal from the company.
  • A seemingly harmless associate with no apparent agenda. Their behavior won’t be as easy to spot as the first two. Having audits and checks/balances in place will likely help you catch them.

How they do it

These are not always tell-tale signs of fraud, but those who commit internal fraud are likely to:

  • Always be willing to take on additional tasks that could lead to fraud and have nothing to do with their current duties.
  • Learn as much as they can about company systems to use in conducting fraud. Systems can include but aren’t limited to: accounting, accounts payable/receivable, payroll, bank account access. They will look for weaknesses in policies or procedures.
  • Earn management’s trust with regard to the most vulnerable parts of the company.

Once they gather the necessary information and gain the trust of the company leaders, they will begin their plan. This could be creating “ghost” associates in payroll or diverting funds to a new account for a fake vendor. Sometimes it’s as simple as stealing money directly or even selling confidential company information on the internet.

Why they do it

The best example of why an associate will commit fraud is described by Dr. Donald Cressey as the Fraud Triangle Model, a tool for assessing the risk of fraud. Cressey was a criminologist who studied embezzlers.

Fraud Triangle

  • Pressure is often financial and usually stems from addiction, living beyond one’s means, major medical expenses, or gambling losses.
  • Rationalization is the explanation why the theft is not really wrong. Some associates tell themselves that it’s a loan and will be repaid. Others feel they are not paid enough and deserve more.
  • Opportunity is the opinion that a fraud can be committed without being caught. The thief sees poor internal controls, poor supervision, poor “tone at the top,” or a combination of these.

One of the best ways to avoid internal fraud is to set up regular, thorough audits and reviews of processes in your company. Stay tuned for an upcoming post that will go into more detail about how to catch internal fraud before it does serious damage to your business.


Dennis Knop is a vice president and corporate fraud investigator of UMB Bank, n.a. He has worked for UMB for 18 years, and 12 years of that in fraud investigation. He has a Bachelor of Science in Criminology and Criminal Justice. Mr. Knop is a Certified Fraud Examiner and currently serves as the treasurer of the Midwest Financial Fraud Investigators Group in St. Louis, Mo.

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