City National Bank
talk with us:
(800) 773-7100

Internal Controls: How to Help Prevent Fraud and Embezzlement

March 13, 2014


When owners think about the risks faced by their business, fraud and embezzlement are not often at the top of the list of concerns. But perhaps they should be.

The median business loss due to occupational fraud is now $140,000, according to the Association of Certified Fraud Examiners (ACFE). Worse yet, smaller organizations suffer disproportionately larger fraud losses — and almost half of fraud victims in the ACFE study didn’t recover any of their losses.

Effect of the Financial Crisis

Some experts believe that the problem of internal fraud and embezzlement has grown worse in recent years as many employees struggle to deal with personal financial crises and challenges. This makes it easier for some of them to justify committing fraudulent acts against their employer that they would never consider under normal circumstances.

This is further evidenced by the fact that the majority of fraud perpetrators (87 percent) are first-time offenders, according to the ACFE study. While there are some recent signs that the U.S. economy may finally be starting to gain some positive traction, many employees are still struggling financially and could be tempted to commit fraud.

Experts point out that three separate elements must be in place in order for fraud to occur:

1. Pressure - Large debts and medical bills, gambling losses, substance abuse and home foreclosure are a few financial crises that can put tremendous pressure on employees to do desperate things, like stealing from their employer.

2. Rationalization - Faced with such pressures, some employees are able to rationalize fraud and theft to themselves. For example, they might tell themselves they’re really just borrowing the money and will repay it as soon as they can.

3. Opportunity - This is the final piece of the “fraud triangle.” Even employees who are able to rationalize theft can’t actually commit fraud unless they are presented with a clear opportunity to steal or embezzle funds.

Sound Internal Controls

The best way to reduce or eliminate these fraud opportunities is to implement sound internal controls. These controls start with ensuring proper management oversight of your business’ finances. Unfortunately, some business owners (especially owners of mid-sized and larger firms) take more of a hands-off approach to financial management, preferring to delegate this to their accounting and financial staff.

While it’s not realistic for the owner to micro-manage every aspect of the firm’s accounting and finances, the owner should maintain some level of financial oversight. Doing so sends a clear message to the accounting and financial staff that you are serious about financial mismanagement and fraud.

For example, take a close (not just a cursory) look at the business’ bank statements each month. And personally sign all business checks yourself, instead of using a check stamp. Consider converting check payments to electronic or ACH payments where restrictions can be placed on which employees have access and approval rights. Taking just these steps could go a long way toward eliminating some of the biggest fraud opportunities that exist at most companies.

Another important internal control is to segregate duties among your financial and accounting staff. For example, make sure that at least two different employees are responsible for tasks like filing out deposit slips and entering cash receipts. This will make it harder for one employee to skim money and escape detection.

Finally, talk to your bank about services it offers that can help protect your business from fraud. One of the most effective is Positive Pay, which compares checks presented to the bank for payment to a check-issued list provided by your company. The bank will only pay checks that are an exact match to the check-issued file, flagging the others and letting you decide whether to pay them or not. ACH Positive Pay is a similar fraud protection service that allows you to choose which electronic payments should be paid from your account.

To discuss internal controls and fraud prevention steps, including services like Positive Pay and ACH Positive Pay, in more detail, give us a call at (800) 773-7100 or Contact Us and request that a Relationship Manager contact you.

Foreign Exchange

Booyah!!

U.S. November job gains far exceeded expectations rising by 321,000 which is the most since January 2012.

Read More..

Global Perspectives

The Biggest Loser 2014

Yes, there are still a few weeks left in the year, but so far the leading candidate for  biggest currency loser in 2014 among major economies looks to be taken by the Russian ruble."

Read More..

Market Perspectives

Peering into 2015

The nerve-racking V-shaped performance of the stock market in October, when the S and P plunged by nearly 10% but then recovered by month-end to a new all-time high, has given way to a more docile period.

Read More..