The Tribune

By Nathanial McKenzie

Partner, UHY Bain & Associates

As a forensic accountant who has analysed a considerable number of employee fraud matters, I have found among them a shared theme: All could have easily been prevented. The simple truth is that most frauds affecting businesses are, well, simple. This article details cash concepts that provide the framework for fraud prevention.

CONTROL THE CASH

The best way to prevent a fraud involving cash theft is to have a ‘no-cash’ policy. While not practical for ‘bricks-and-mortar’ retail stores, service companies should give utmost consideration to a ‘no-cash’ policy.

For example, the majority of frauds I have investigated at doctors’ offices involve an employee stealing cash from co-payments. A ‘no-cash’ policy eliminates this problem at its root. In today’s age of debit cards, credit cards and the like, a ‘no-cash’ policy would seemingly not affect most customers.

If a ‘no-cash’ policy is not practical, there are other options to control cash. First, companies should make it a practice to deposit all cash receipts several times per week, if not daily. Keeping cash on the premises serves as a magnet for filching employees.

Also, company owners, or a high-level employee, should review the bank-generated deposit tickets. A review of the deposit receipt will reveal red flags in the form of little or no cash deposits. I investigated a fraud in which the bookkeeper did not deposit a single cash receipt for months. The deposit receipts clearly told the story; had these been reviewed, it would have saved the company from losing a six-figure sum.

PERFORM COMPARISONS

In most cases of employee theft, the perpetrator takes steps to conceal their misdeeds. This typically involves manipulating the accounting records in some fashion. Thus, comparisons between the accounting records and other documents can stop an internal fraud in its tracks.

The employee theft scheme most often seen is ‘lapping’. Under this scheme, a person first removes cash from certain deposits. In order to restore the deposit to the appropriate level, the person replaces the misappropriated cash with an equal amount of checks. Accordingly, on any given day that lapping occurs, a comparison between what was posted to a customer’s account, and the actual checks deposited, would reveal a discrepancy. The scheme would unravel from there.

Another employee fraud scheme involves an employee writing a check directly to himself or herself. In these cases, the concealment usually involves doctoring the copy of the check image received with the bank’s monthly statements. The comparison is best performed by matching the internal check copies with online images at the bank’s website.

These crimes can be perpetrated by employees, vendors or even former employees who know the environment, and may still have access to systems.

Reasons fraud can occur within your company are many, including:

• Greed

• Poor accounting controls within your company

• Organisational complacency, such as working with the honour system

• A lack of defined accountability over the cash handling process

It is difficult to eliminate greed, but the other three issues can be managed through proper oversight and internal controls.

Any agency that accepts cash, money orders, checks or gift cards is inherently subject to fraud or theft. Opportunities to commit fraud are likely to occur in three critical areas: Where internal controls are weak; where there is a lack of segregation of duties; and when management can override preventive controls. Cash has the greatest potential for theft if a system of internal controls is not in place and functioning effectively.

If you think fraud is occurring within your company, you are probably right. The risks associated with theft and fraud not only include financial risk, but also reputational and operational risks that are potentially damaging.

Therefore, you must be proactive and conduct a risk assessment to know where your risks are, define them and ensure that controls fit the needs of your company.

• NB: Nathanial McKenzie is a partner at UHY Bain & Associates. UHY Bain & Associates is a member of Urbach, Hacker & Young International Ltd, a UK company, and forms part of the international UHY network of legally independent accounting and consulting firms.