Two year-end fraud procedures for all business owners

All too many times in cases of fraud, it is discovered that one of the most trusted employees has been skimming a little extra money each month and has never been caught.
Stacey Hekkert, CPA President and managing partner, Anton Collins Mitchell LLP, Denver

Stacey Hekkert, CPA
President and managing partner, Anton Collins Mitchell LLP, Denver

Your bookkeeper or internal accountant has been with you for years. He is the most trustworthy person in your organization and you would never suspect him of doing anything dishonest. Chances are you are correct in your belief. However, all too many times in cases of fraud, it is discovered that one of the most trusted employees has been skimming a little extra money each month and has never been caught. You will certainly catch wire transfers that look odd. You have multiple approval levels. You require two check signers. However, there are a lot of small payments and perhaps recurring credit card charges that add up to big dollars over the year. As financial service professionals, we have seen many instances where a trusted controller or financial person has lined his own pockets without an owner suspecting anything. Here are two simple things that all business owners can do in 10 minutes or less to protect their businesses and put a second set of eyes on cash disbursements that roll through the business.

The unorthodox cash disbursements review. When a company makes multiple disbursements throughout the year, it is difficult to catch duplicate payments, unusual amounts or errors. These irregularities can be identified in a 30,000-foot view of disbursements at the end of the year. This is by far the easiest and most effective review procedure any business owner can do – especially if he is not in the details every day or uses a property manager to handle the accounting for his building. We do this procedure for business owners on all of our audits, and our clients always are shocked and surprised by what they see. They are not shocked because they immediately see fraud or errors, but they’re taken aback because they did not realize how much they pay certain vendors over the course of the year. The added benefit and value of this internal control procedure is that it gives an owner a 30,000-foot view of the business spending as well.

To do this simple review, have your accountant download all your disbursements, including check registers, ACH payments and credit card activity (if you’re one of those people who likes to accumulate miles and points) into an Excel file. First, sort the disbursements alphabetically by vendor. Depending on the size of your business, this may seem like an unwieldy task, but if you own a commercial property or hotel, you will be surprised how short the list actually is once payroll is excluded. Now scan the result; my guess is you will find more than one item that gives you pause and causes you to request backup. If for some reason you do find the list too cumbersome, simply subtotal the disbursements by vendor so it’s more manageable. You will lose some of the granularity that helps identify potential errors and duplicate payments, but you may still identify unauthorized vendors or inappropriate amounts of spend for a vendor.

Second, add a tab and sort the disbursements in dollar-descending order by disbursement and make sure your largest disbursements are actually to the vendors you expect to see on the list. Many times business owners will sign checks all year long but never step back to aggregate and accumulate the total dollar value spent with a particular vendor. This unconventional view of disbursements will provide a gut check on where your dollars are being spent. It doesn’t matter where in the general ledger these disbursements are being coded to; that is accounting. Right now we are just talking about cash. Cash is king and where is your cash going? It is very powerful to see your total spend by vendor in aggregate. What seemed like a small recurring charge can build up when you have multiple properties and seeing the total spend in aggregate may give you more negotiating power.

This procedure is particularly important if you use credit cards or other auto bill pay platforms in the age of subscription-based service models. Most companies have several layers of review and approval for checks above $5,000, but what if you have a $400 or $800 monthly recurring charge? Would you notice? Recurring charges are really the same as writing a vendor a $5,000 or $1,000 check. Seeing aggregate spend is powerful for both fraud and error detection as well as evaluating your overall business spend.

The seepage of cash through credit card returns. Taking credit cards is the norm; it’s easy and a perfectly acceptable form of payment. Credit card receipts accelerate cash flow and they are easy for the customer. Although we all grumble over the fees associated with taking credit cards, timely collection of cash is generally better than the fees we paid to the processors. Credit card processing traffic, however, is a two-way street. Payments are processed and outstanding accounts receivable are collected, but refunds via credit cards also are occasionally processed as well. Every time a deposit is processed, there also is an opportunity for someone on your accounting staff to process a refund. A growing area of fraud is unauthorized refunds being applied to an accounting staff’s personal credit card. In essence, you could be paying for someone’s personal credit card use when he processes an unauthorized refund on his own personal card. Credit card companies are developing software to track refunds and send alerts regarding suspicious activity, but it’s also relatively easy procedure for a property owner to get the statements from your processor for the year and quickly scan to see what refunds, if any, were processed by your terminal. We encourage all business owners to take five minutes to scan their credit card statements and review for refunds or other unusual activity.

These two procedures above seem very simple and basic. It might actually be the one of the most powerful 10 minutes you can invest in your business. And if your accountant or controller is unable to run a simple disbursements listing or annual credit card activity statement in Excel, perhaps that’s also symptomatic of something you should investigate further.

Featured in CREJ’s December 7-20, 2016, issue

Edited by the Colorado Real Estate Journal staff.