Business attorneys like yourself are always trying to help clients prevent fraud in their businesses. To prevent fraud, it is critical first to encourage your clients to develop a policy to deter fraud and make employees aware of the impact of fraud on the organization. This includes the loss of profits, adverse publicity, potential job loss, and decreased morale and productivity. Management also should set up a strong internal control structure to mitigate the risk of this type of fraud occurring in the organization. In addition, management must communicate that they are open to employees speaking freely and are receptive to information from employees when faced with unethical decisions, along with an employee hotline to report tips anonymously of suspicious behavior. Management must convey a zero-tolerance policy to the employees through words and actions.

Occupational fraud:[1] Asset misappropriation involving employee stealing and misuse of resources is the most common, with 86% of the cases reported with a median loss of USD 100,000. Corruption was reported at 50% with a median loss of USD 150,000, and financial statement fraud was at 9% with a median loss of USD 593,000.

Reconciliation of transactions and verification of supporting documentation is also crucial to preventing expense reimbursement schemes. It is essential to require expense reports to include the receipts matched to those expenditures. Cloud-based expense and travel management software packages will track expenditures, but regardless of the software used, someone in the accounting department must review it. Credit cards should be treated as cash and reconciled by someone in the accounting department who is not responsible for credit purchases or payments on the card. Periodically the organization’s internal auditors should review the reports from the software system and compare the transactions with the receipts before month-end close. This would enable the accounting department to be alerted to any possible fraud early before it gets out of control. Discrepancies should be addressed at once directly with the responsible party in the accounting department and discussed with the CEO and CFO.

The lack of proper monitoring of employee spending can result in fraudulent activities. In the following scenario, the company allowed an officer to keep the company credit card. The officer was a long-time employee responsible for buying assets and materials, recording the receipts into an expense tracking system, and authorizing payment. After receiving a tip from an outside contractor, it was found that the officer was using the credit card for personal expenditures. In the last six months, the expense supporting documentation revealed photoshopped receipts, actual receipts with deliveries to his home, and other questionable expenditures. The matter is still under examination. To date, the loss is more than $500,000, and the employee has been fired.

If your law firm requires skilled, experienced, and professional forensic accountants to help your clients avoid fraudulent activities in their organization, contact Chief Investigator Edmond Martin, Strategic partner Toni Lusk, CFE of Sage Investigations, LLC at 512-659-3179 or email them at edmartin@sageinvestigations.com. We offer a free 20-minute consult. Visit our website at www.Sageinvestigations.Com. Click to read about the Sage Team and their CVs.

[1] 2020 ACFE Report to the Nations