Top Ten Internal Controls To Prevent And Detect Fraud!

We connect the fraud directly to the risk of compensation or benefit loss, job loss and company closure. We highlight reputational risks that can arise from fraud, either from the act itself, or that a fraud was discovered. During this phase we provide specific examples of cases that caused the demise of an organization and the subsequent job losses. Sadly, examples abound, and stories such as Clive Peters, the Australian big box electronic store that was taken down by a lone payroll clerk, are highly effective. These employees have access to the information that can do lasting and irreparable damage to your company. Create a well-monitored reimbursement policy for employee expenses and stick to it. If you’re going to give credit cards to employees, ensure that the card provider has suitable fraud protections in place, such as automatic alerts if an employee spends over a certain amount.

employee fraud prevention

Provide Board of Directors oversight of agency operations and management. Monitor the agency’s financial activity on a regular basis, comparing actual to budgeted revenues and expenses.

You should also make it part of your mission to be open with your employees about your stance on fraud and theft and ensure they understand you have no tolerance for theft in the workplace. While this should be outlined when you first hire your employee, you should take every effort to ensure that your views on this are not hidden. When employees are aware that you take this seriously, they’ll be much less likely to try it. If your organization becomes a victim of internal fraud, it won’t just hurt the bottom line — the incident also could do devastating damage to your reputation. By implementing some simple controls, though, your organization can help protect itself from these risks. Through our conversation, I outlined all the different hands the check traveled through — a minimum of six pairs — before the check was safely deposited into the bank account and the funds received.

Prevention Measures

There are companies that can provide this service for you. When you narrow down a list of potential hires to one or two people, you can run a check on the finalists before making your final decision. Make sure you obtain proper permission to run the check. Keep funds in a locked box or drawer and restrict the number of employees who have access to the key. Establish a policy that credit cards are for business use only; prohibit use of cards for personal purposes with subsequent reimbursement. Similarly, the staffer who makes bank deposits shouldn’t be charged with reconciling the organization’s bank statements.

  • Ensure that all cash and checks received are promptly recorded and deposited in the form originally received.
  • It’s particularly important to get professional help as soon as you spot a potential problem.
  • Empowering employees with the knowledge and awareness of fraud in the workplace is key to increasing employee tips.
  • Examine bank statements and cancelled checks to make sure checks are not issued out of sequence.
  • In these schemes, employees are on the books and getting paid, but they don’t exist.

When an employee is suddenly living well beyond their means, that could be a sign of fraud. To successfully pull off a scheme, the employee has to have the patience, access and knowledge to succeed. Four components – opportunity, rationalization, pressure and capability – create an environment conducive to fraud.

There are several well-regarded cyber-security vendors. Fraud Matters, Winter 2007 Forensic accountants stress that the best way to prevent fraud is to establish an efficient control system How much should you spend on such a system? And, perhaps, most importantly – What is the price of doing nothing? The Association of Certified Fraud Examiners and other groups provide the guidance below.

What Are The Different Types Of Employee Fraud?

That’s largely because there are so many different kinds of fraud. Require that related party transactions be disclosed and be approved by the Board.

One of the most important preventive measures is the segregation of accounting duties, especially those related to executing outgoing payments. You should assign different employees to approve, record and report transactions. And the employee who generates checks for payment or approves invoices shouldn’t also be responsible for signing checks or initiating online payments.

Developing The Training

While fraud can be devastating, there are ways to go about preventing and reducing the risk to your company. With this in mind, here’s a look at some steps you can take to help prevent employee fraud. The truth is, employee theft comes in many different forms, and there simply isn’t a one-size-fits-all solution when it comes to preventing fraud. From outright embezzlement to skimming extra hours, any form of employee fraud is serious, and all instances can cost your business and negatively impact your bottom line.

Limit the petty cash replenishment amount to a total that will require replenishment at least monthly. Participate in the hiring/approval to hire consultants including the independent auditors. Document approval of financial procedures and policies and major expenditures in the board meeting minutes. Inform employees of appropriate use of the cards and purchases that are not allowed.

Examine credit card statements and corresponding receipts each month, independently, to determine whether charges are appropriate and related to agency business. Use a system of checks and balances to ensure no one person has control over all parts of a financial transaction. Require purchases, payroll, and disbursements to be authorized by a designated person. A list of warning signals or red flags that can be used to educate the organization, including both employees and board members. Corruption is the second most common type of employee fraud.

James I. Marasco, CPA/CFF, CFE, CIA Jim is a partner at EFPR Group. He brings more than 18 years of public accounting and auditing experience. He is a full-time management consultant and travels extensively throughout the country while leading StoneBridge Business Partners . We provide a complete suite of accounting and finance staffing & outsourcing services.

Protect Your Bank Accounts

Discourage the hiring of relatives and business transactions with Board members and employees. Require paychecks to be distributed by a person other than the one authorizing or recording payroll transactions or preparing payroll checks. The goal of the assessment is to identify any vulnerabilities and gaps in internal controls that could leave your organization susceptible to damage to its finances and reputation. Management should encourage employees to report any suspicious activity and enforce an anti-retaliation policy so employees aren’t reluctant to speak up. Ideally, the hotline should be anonymous, or at least confidential.

All information presented is without any representation, guaranty, or warranty regarding the accuracy, relevance, or completeness of the information. This is just a small list of employee fraud types; be on the lookout for any type of employee fraud. Thomas advised minimizing the amount of exposure and access employees have to information. Also, periodically reconcile overlapping financial records. For example, compare receipts that are recorded in the billing system to revenues recorded in the accounting system, and then cross-check those numbers with your bank deposits.

Purchase Insurance

At the time, customers liked to come into a location and pay their invoice in person. The location would mail the checks to the cash application department at headquarters for posting and depositing. Sally was a longtime employee who valued the in-person nature of our business and was happy to take the checks received in her department to the bank for deposit. What Sally didn’t understand was the risk of check fraud involved in that scenario, and because she didn’t understand that, she didn’t know where the process had vulnerabilities.

Types Of Employee Fraud

One of the best ways to find out what is really going on with your employees is from those who they are in close contact with. While many people are leery about turning their fellow co-worker in, you can make it possible for your employees to provide anonymous tips or insight to theft.

Employees should know that unannounced audits are possible, but they shouldn’t know what data they’ll cover. Such audits need not be top-to-bottom reviews of the finances. Examine your policies, procedures and processes for any faults in the system for protecting integrity and ethics. Conduct a risk assessment every two years or whenever there’s a major system change.


Consider backing up your files on a daily or weekly basis, and store them offsite. If something happens to your system, you’ll be able to restore the files you need without much downtime.

Check out our fraud prevention solutions to help protect your business. Ensuring you equip your business with the right tools is half the battle against fraud. Be proactive and make sure your company is carrying these tools in your fraud prevention kit.Positive Pay. This service will eliminate your exposure to check fraud, externally and internally! It helps prevent voided checks, checks with altered payee names, stale-dated checks, and counterfeited or duplicated checks.

If your operation is too small to segregate duties fully, consider rotating staff through the various duties regularly, or involving a board member to oversee the process. You also can adopt a mandatory vacation policy to make it more difficult for fraudster employees to conceal their schemes. The risk of employee fraud is much higher for small businesses than it is corporations.

This can be achieved by delegating control among the entire team rather than giving it all to one trusted person. Stalcup said that if only one person is responsible for all the accounting information, there won’t be any effective internal controls to prevent fraud.