Fraud Prevention: Look, Listen, and Verify

Employee theft is often discovered accidentally because suddenly someone finds there was a problem, such as thousands of dollars paid for personal purchases using the company credit card or checks written to and endorsed by an unauthorized person in the bank records. But most fraud occurs slowly over time and goes unnoticed because those in charge weren’t looking.

Advice for preventing that kind of fraud usually includes tactics like risk assessment, internal controls, and segregation of duties. Although these activities do reflect best practices, they can be difficult to implement when your organization is short on staff and time. Here are some simple practices that will allow you the most fraud-prevention benefit at the lowest cost.

Watch the Mail

Someone in a leadership position, such as the executive director or an executive assistant, should be responsible for getting, opening, and looking at the mail. Those incoming envelopes hold a trove of important information, such as correspondence from government agencies, including the IRS; complaints from vendors and clients; and bank, credit card, and investment statements. Allowing staff members to get and open the mail gives them the opportunity to hide, alter, or destroy critical information that could lead to the discovery of theft.

Review Financial Reports

Organization leaders should always look at financial reports. They should be reviewed weekly or monthly at a status meeting, so there is accountability for accurate and timely financial reporting. The review should include:

• account reconciliations, including credit cards, checking, savings, and any other such accounts
• cash receipts and disbursements reports
• financial statements, including statements of financial position, activity, cash flow, and expenditures
• accounts receivable, especially related write-offs, and accounts payable reports

Make sure that organizational procedures are well established and documented for each function, especially accounting, to understand operational workflow and who does what.

Sometimes these reviews raise donor, vendor, or government agency issues, such as finding an unknown or unapproved vendor receiving payments or finding that required payments to government agencies have not been made. Identify parties responsible for investigating these issues and set deadlines to resolve them.

Employee Behavior Red Flags

Conventional wisdom tells us that longer-tenured employees are more valuable and trustworthy, which is true in many cases. Executives are more likely to trust a long-term employee with a signed blank check, a signature stamp, or a bill that comes without supporting documents. Executives also tend to accept what long-time employees say at face value and give them greater authority to make decisions that affect the organization. With longer tenure and greater trust comes less oversight.

It might be surprising, but often the person stealing from an organization is a long-time, dedicated, and trusted employee. Over time, life’s circumstances change. An employee who, in the past, had no proclivity toward stealing might face differing circumstances—a tragic event at home, an addiction, or frustration at work because of a higher workload or lack of promotion. Or a staff member might simply see a weakness in the control system and choose to exploit it.

Of course, not every long-term employee is going to steal. But managers should be aware when any employee—short-term or long-term—begins acting in ways that are notable departures from their past behavior. Some common changes of which to be aware are aggression, possessiveness of job duties, refusing to take vacation, taking too much time off, and living beyond one’s means.

Establish Checks and Balances

Make sure that organizational procedures are well established and documented for each function, especially accounting, to understand operational workflow and who does what. This will minimize disruption during staff turnover. Organizations should also have strong policies about acceptable and unacceptable employee workplace actions, such as a requirement to report any financial misconduct and a prohibition on self-dealing.

Many internal controls are both simple and free to implement. For example:

• Require supporting documentation for every disbursement, and never allow staff to remit payments without oversight.
• When making disbursements, don’t give the signed check back to the preparer; instead, either send the check yourself or give it to another employee to send.
• If you have to ask more than twice for a piece of information—whether a check, an invoice, or a bank statement—be concerned. Bypass the person who is failing to respond and go directly to the source.
• Pay attention to staff members who might be making purchases, such as big vacations, that seem inconsistent with his or her paycheck.

If no other controls are implemented, first make sure that you as the ED or your assistant is opening and reading the organization’s mail. Second, make sure that you personally review bank and credit card statements. That simple action can often catch a misuse of organization funds, making it much less likely for you to be blindsided by an accidental discovery of employee theft.