The Favorite Target of Fraudsters
Thomas A. Buckhoff
is the lifeblood of any organization. All organizations
have cash flowing both in and out. Research indicates that
about 92% of all asset-theft fraud schemes involve cash,
with median losses of $65,000 per incident. About 66% of
cash schemes involve outgoing cash (disbursements) and 34%
involve incoming cash (receipts).
a sales representative for a medical supplies vendor, “Mark
Price” sold medical supplies directly to doctors at
local hospitals. Mark had a falling-out with his employer
and was fired. Mark continued to work with the hospitals
as if he were still a representative of the vendor and hand-delivered
false invoices printed on stationery he had kept after his
termination. One hospital refused to pay the false invoices
because receipt of the invoiced items could not be verified.
Another hospital, which did not have an organized system
for keeping track of incoming supplies, paid the false invoices
by giving checks directly to Mark, rather than mailing them.
Using an endorsement stamp from his former employer, Mark
stamped, dual-endorsed, and deposited the checks into his
personal bank account. Mark stole about $200,000 in less
than a year before his scheme was discovered.
a hospital employee, “Linda Jones” was responsible
for receiving, recording, and depositing incoming payments
from insurance providers and patients. For three years,
Linda exploited these incompatible responsibilities and
diverted cash to herself. Stolen checks were either swapped
for cash internally or were dual-endorsed and deposited
directly into Linda’s personal bank account. She concealed
her fraud by recording the stolen funds as a “charity
write-off.” Linda’s fraud was discovered when
some clients questioned why some payments never appeared
on their statements and the dramatic increases in the charity
write-off account could not be explained. After a lengthy
investigation, Linda was convicted and sentenced to prison.
should develop and implement formal programs for safeguarding
cash. Because fraud losses are estimated to be about 6%
of gross revenues, the savings from such programs can far
outweigh the costs.
of duties. When one person controls multiple
phases of a transaction, the risk of fraud increases dramatically.
Frauds involving such collusion are rare: 70% of all frauds
are committed by one person acting alone.
determine whether employee responsibilities are incompatible,
divide business transactions into four phases: authorization,
execution, custody, and recording. The authorization phase
requires one employee to direct another employee to initiate
and execute a transaction. The execution phase requires
an employee with authority to initiate a transaction; for
example, when a doctor places an order for supplies from
an approved vendor. Custody is the actual possession of
the asset. Recording requires adjusting a company’s
accounts to reflect the effects of the transaction. Employees
whose responsibilities encompass two or more phases of a
transaction can divert cash into their own pockets. When
opportunities to commit fraud exist, someone has likely
already exploited them. The role of fraud investigators
is to determine the extent of the losses.
over cash disbursements. The most effective
way to prevent theft of cash disbursements is to segregate
the duties of preparing checks (an authorization duty) and
signing checks (a custody duty). Before preparing checks,
the employee should verify that the items listed on the
vendor invoice were both ordered and received. Copies of
purchase orders and receiving documents should be made and
forwarded to the person responsible for preparing checks.
The check signer should carefully review the check, along
with the supporting documentation; mark supporting documentation
as paid, with the date and check number; and control the
delivery of the check (i.e., do not return a signed check
to the person who prepared it). Finally, a third person
should review all cancelled checks and perform monthly bank
to basic controls over cash disbursements can easily prevent
fraud schemes such as the example of Mark Price. Organizations
without organized systems for keeping track of payments
and receipts are breeding grounds for fraudulent activity.
over cash receipts. The most effective way
to prevent theft of cash receipts is to segregate the duties
of cash handling and recording. For example, two people
together should open mail containing incoming cash. One
person prepares a detailed remittance list, which then is
used to adjust appropriate account balances. The other person
handles the cash, prepares the deposit slip, and deposits
cash receipts into the bank as soon as possible. Finally,
a third person should reconcile bank statements, deposit
slips, and remittance lists.
case of Linda Jones, described above, demonstrates how an
individual with a custody duty can steal incoming cash and
then conceal it through a recording duty (the false entry
in the accounting system). A segregation of these duties
makes it difficult for a dishonest employee to steal the
checks. About 30% of employees intend to steal
from their employers from the first day they are hired.
Typically, such employees have questionable backgrounds.
A background check should include independently checking
criminal records, driver’s license records, civil
and federal court records, references, credit reports, employment
history, and education records. Those with questionable
backgrounds are high-fraud-risk employees. If hired, they
should not be placed in positions where they would have
access to cash.
hotlines. Most frauds are known to others
within the organization and are discovered by receiving
an inside tip or complaint. A fraud hotline can effectively
uncover and prevent fraudulent activity. Fraud losses tend
to snowball over time: Organizations with fraud hotlines
can cut their fraud losses in half. Few people will commit
fraud if they think they will be caught. Well-publicized
fraud hotlines strengthen the perception of detection and
let employees know the organization does not tolerate fraud.
A. Buckhoff, PhD, CPA, CFE, is an associate professor
of forensic accounting at Georgia Southern University.