Tag Archives | employee theft

7 Warning Signs of Fraud

warning signs of fraudUnfortunately, companies of all sizes can become victims of fraud. In fact, a study on fraud published by accounting firm KPMG International found “a very large increase in cases involving the exploitation of weak internal controls by fraudsters up from 49 percent in 2007 to 74 percent in 2011.” Thus, internal controls are a first line of defense and are important in any size organization. So, implement them to reduce the opportunity for fraud. Whatever the size company, there are some warning signs of fraud that are important to pay attention to.

7 Warning Signs of Fraud

1.  Is the person reconciling the bank statement also a check signer?

These are important duties to segregate. When combined, a person signing a fraudulent check can go on without being detected.

2.  Does your company have several bank accounts?

Multiple bank accounts make inappropriate movements of cash harder to detect. So, make sure you understand the business need for each bank account the company has and use as few accounts as possible.

3.  Do you have a budget to compare with your actual financial results on a monthly basis?

This is an important control in the detection of unauthorized transactions.

4.  Have you noticed a controlling personality or secretive behavior on the part of an employee?

This may be a sign that a person is being deceptive or needs to control people or the environment in order to conceal their activity.

(Have you ever heard of skimming fraud? It’s the most difficult fraud to detect.)

5.  Are there accounts on your financial statements that you do not understand?

Ask! If your question is not welcomed or answered to your satisfaction, then pay attention to this response.

6.  Financials that are not timely or closed on a monthly basis.

Lax or non-existent cut offs leave room for inappropriate entries in months long gone.

7.  Are employees related in your accounting department?

Part of a functioning internal controls system is the need for collusion in order to circumvent controls.

The Fraud Triangle

What is the motivation for an employee to steal?  The fraud triangle shows us 3 following conditions:

  • Pressure (motivation or intent to steal)
  • Rationalization (justification of dishonesty)
  • Opportunity (ability to carry out misappropriation of company assets.)

Well designed internal controls serve to mitigate the opportunity for fraud in your organization.

(Have you every wondered does fraud follow economic cycles?)

How to Reduce Fraud

What can you do to reduce the chance for fraud in your organization? First, remember that internal controls are necessary for all size organizations. Check out the following ideas that you will find helpful as you assess controls in your organization:

Live Ethics in Your Corporate Culture 

A culture of ethics starts at the top and you start by demonstrating it on a daily basis. We cannot emphasize this enough as it sets the bar for acceptable behavior in your organization.

Trust is Not a Control 

Trust is not a control, so design internal controls. Then put them in place for the position. Thus, they should not be for a particular employee, regardless of how trusted that employee is.

Pre-Employment Screening

Conduct pre-employment screening including background checks as appropriate.

Utilize Entire Team

If you do not have enough employees in accounting, then utilize others as part of your control system.

Have Different Signers

If your bank account reconciler is a signer, then find a different signer. Segregate the check cutting, signing and reconciling duties from each other.

Unbiased Reviewer

Have the company bank statements go unopened for review by someone in a management position who isn’t cutting or signing checks.

Choose Signers Carefully

Understand what authority signers have with company bank accounts and choose signers carefully. Add extra controls to your corporate bank accounts – an example is precluding any counter withdrawals so that all bank account withdrawals go through the check writing process.

Anonymous Alert System

Set up an anonymous way for your employees to alert you of any concerns/suspicions related to potential fraud within your company. Then take these alerts seriously.

Segregation of Duties & Controls

Segregation of duties and internal controls protect both your employees and the company.

If you want to reduce the fraud or detect fraud in your company, then check out our free Internal Analysis whitepaper. We have designed this whitepaper to assist your leadership decisions and create the roadmap for your company’s success!

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Inventory Shrinkage

Inventory Shrinkage Definition

Inventory shrinkage means that, somewhere along the line, there is a drop in product numbers from the time of manufacture to the time of sale. Clearly, this is a bad thing for both the consumer and the producer. On the producer side of things, the inventory shrinkage factor causes an uptick in product costs as a result of the producers needs to keep profits high. Because of the uptick in product costs, this means that prices on the products are going to go up as a consequence. Furthermore, because of the increase in prices by the producers, the consumers are adversely affected as well. More obviously, the consumers have to pay higher prices for the products than they would have without the shrinkage of inventory. The shrinkage of inventory is a problem because it causes an economic loss as a whole for the entire market.

Inventory Shrinkage Problems

Now that we know what inventory shrinkage causes, as well as what it is as a whole, what causes inventory shrinkage? If one looks at the regular flow of production for a business, products go from Work in Progress, to Finished Goods Inventory, to Sold Products. In a perfect world, there shouldn’t be a point in this process where products just vanish (causing inventory shrinkage). Therefore, one of the likely conclusions settled upon is that there is some sort of malpractice involved with the act.

One of the main forms of inventory shrinkage comes as result of employee theft. That is, employees are taking finished goods out of the finished goods inventory and stealing them. Obviously, the producers/retailers are receiving no profits from these products. Similarly, another inventory shrinkage cause comes as a result of shoplifters. Like employee theft, the outside stealing of company products leads to shrinkage in inventory and a drop in profits. However, inventory shrinkage is caused by more than just theft. Inventory shrinkage reports have shown that paperwork and clerical errors are also a known causer of inventory shrinkage. Even more simply, shipping problems and misplaced inventory in general are both known to be causes.

Inventory Shrinkage Internal Control

To put a leash on the amount of inventory shrinkage caused by employee theft and stealing, a retailer should impose extra security measures. This include guards, cameras, fences. However, you can only cure paperwork errors and mistakes by careful attention to details. A manager should strive to maintain a mantra of efficient internal control. Cut down on internal errors that lead to inventory shrinkage. As a result, profits will rise while prices go down for consumers.

Instead of allowing a weakness in your company to continue, check out our free Internal Analysis whitepaper to assist your leadership decisions.

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