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16 Tips for Avoiding Fraud

By Ron Klein

The most common method of fraud detection (true for almost one-half of all cases) is a tip or complaint from an employee, vendor, customer or anonymous informant, according to the Association of Certified Fraud Examiners (ACFE). About one-fifth of all cases are detected by accident, another one-fifth by internal audit and about one-eighth by external audit.

The relatively low detection rate of fraud by audits does not accurately reflect the effectiveness of audits as deterrents to fraud. Although audits detect about one-third of all frauds, audits deter an unknown number of potential frauds by putting personnel on notice that a theft is likely to be detected.

Clients and CPAs can use the following tips, compiled from a variety of sources, to prevent the vast majority of fraud crimes:

Internal Controls

1) Separate the duties of receiving funds, disbursing funds, writing checks, signing checks and reconciling bank accounts. Having one employee responsible for all cash-related functions makes small businesses vulnerable to fraud.
2) Have the monthly bank statement delivered unopened to the owner, who should review it for unusual transactions such as declining deposits and unfamiliar payees.
3) Owners should look for signatures or endorsements that look forged, missing checks, check numbers that are out of order and checks where the payee listed does not match the name in the check register.
4) Consider an independent review of the cash accounts and bank statements by an anti-fraud specialist.
Employment Conditions
5) Institute background checks on new employees, and notify job applicants that their backgrounds will be checked.
6) Employees who receive regular and recurring training about the detrimental aspects of fraud are more likely to aid in controlling it.
7) Employees who feel well treated and adequately compensated are less likely to commit occupational fraud than those who don’t.
8) Employees who hold grudges against their employers—whether or not justified—are more likely to turn to occupational fraud and abuse.
Workplace Conditions
9) Insist that employees take a vacation for at least one week every year, and use that time to have the books reviewed for discrepancies.
10) Adopt a tip hotline or complaint-reporting mechanism that will enable employees, vendors, customers or outside sources to report suspected fraud anonymously or without fear of reprisal.
11) Employers can gain valuable information by simply asking questions in a nonthreatening, nonaccusatory manner.
12) Conduct internal and external audits, especially a “fraud audit” instead of a “general audit” if you suspect fraud.
Automation
13) Have an accounting software program expert, preferably a CPA, do the initial set-up of the program to make sure that helpful features are turned on and unhelpful features are turned off.
14) Access to personnel and vendor master file records should be password protected and restricted by job function.
15) Computer systems should create an audit trail of all changes made to the vendor master file records, including an identification of those who made the changes.
16) Changes to vendor master file records should require supporting documentation, supervisory approval and independent review.

Warning Signs

CPAs should advise their clients about the risks and warning signs of fraud-prone employees, including:

  • unresolved financial problems,
  • living beyond one’s means,
  • compulsive gambling,
  • alcohol or drug abuse,
  • a close relationship with a supplier who might conspire in a fraud,
  • never taking a vacation,
  • working late all the time (in order to cover a paper trail), and
  • being secretive about one’s work.

A significant number of claims result from CPAs not advising clients about what they should or should not do to avoid fraud risks. CPAs should make every effort to communicate liability concerns. Camico recommends two types of letters in this area:

  • engagement letters for all types of engagements, to help bridge the “expectation gap” between what the client expects and what the CPA delivers; and
  • advisory letters, to help explain client exposures to the risks of defalcation or fraud, and the need for internal controls.

On the bright side, many clients expect their CPAs to give them advice about potential weaknesses in their financial operations. When CPAs meet this expectation, they increase their perceived value and create practice opportunities.

Ron Klein, J.D., CFE, is vice president of claims with Camico. Recipient of the 2002 Award for Outstanding Conference Speaker from the Education Foundation of the California Society of CPAs, Klein co-authored the CPA’s Guide to Loss Prevention Practices and CPA’s Guide to Effective Engagement Letters.