Fraud Prevention and Detection Starts With You

The nature of an independent audit can sometimes be misconstrued; business owners sometimes think auditors should be able to detect fraud. Fraud, by definition, is “any act, expression, omission or concealment calculated to deceive another to his or her disadvantage; specifically a misrepresentation or concealment…”(Merriam-Webster Dictionary of Law). By this definition, fraud is not easy or always practical to detect. Fraud means someone is trying to hide something, and the people who know the business the best and would be able to identify fraud and how it could be perpetrated are the employees and owners of the business.

Here are some ways that Leon A. LaRosa Jr., CPA, suggested in a March 2007 Journal of Accountancy article to help prevent theft:

  1. Conduct background checks on prospective personnel, check references and scrutinize time gaps in resumes. Also, if they handle cash or financial functions, consider having them bonded.
  2. Segregation of Duties – a member of top management or an owner should be the first to review all bank account entries and canceled checks. Someone with no authority to issue checks should perform the monthly reconciliations. Also, the person opening the mail should not be the same person making deposits and performing accounts receivable. This person could keep a list of all money received independently.
  3. Keep a vendor list, and any new vendors should be independently verified by an owner or manager.
  4. Make employees take vacations, at least a week at a time, and make sure someone else is cross-trained to perform their jobs and able to double check their work. Also, look for red flags in employee behavior such as living beyond their means, large personal debts, excessive gambling, or excessive dissatisfaction with their job.

Please contact your local Rea office if you need assistance for your company in setting up strong internal controls to assist in preventing and detecting fraud more timely.

This article was originally published in Illuminations: Facts & Figures from people with a brighter way, a Rea & Associates enewsletter, 8/8/2007.

Note: This content is accurate as of the date published above and is subject to change. Please seek professional advice before acting on any matter contained in this article.