Forensic accountants are best qualified to unearth the “hows and whys” of occupational fraud. But it’s up to employers to know when it’s time to call for professional help in the first place. The signs of fraud can be easy to miss, but they’re usually there.

Something doesn’t belong

Dishonest employees may use anything from fictitious vendors to false invoices to cover up theft. To ferret out potential fraud, look for such signs as:

  • Duplicate payments,
  • Out-of-sequence entries,
  • Entries by employees who don’t usually make them,
  • Unusual inventory adjustments,
  • Accounts that don’t properly balance, and
  • Transactions for amounts that appear too large or too small, or transactions that occur too often or too rarely.

An increase in the number of complaints your company receives is another warning sign. An investigation may lead to a relatively innocent explanation, such as a glitch in your shipping system — or it may lead to a fraudulent billing scheme. Pay equally close attention to declines in product quality. They could just stem from a faulty batch of paint or indicate that a thief is working in purchasing.

Living it up

Changes in an employee’s lifestyle can be evidence of fraud. Although such changes usually are difficult to spot initially, a pattern is likely to emerge over time.

For example, one piece of expensive jewelry could be a gift, and a good investment return may pay for an exotic vacation. But if your warehouse manager brags about his new state-of-the-art home theater, buys an expensive car and decides to install a backyard pool, you should question how that’s possible on the salary you’re paying.

Multiple personalities

When employees steal, especially if they’re first-time offenders, they may no longer be on their best behavior. In fact, you may not even recognize them. People who have always been cooperative may become argumentative. Or, alternatively, someone who typically is difficult to work with may suddenly become everyone’s friend.

If an employee starts drinking to excess or takes up smoking, ask what’s wrong. If they can’t sleep, or if they worry obsessively about the possible consequences of actions and resent other employees’ participation in “their” projects, be concerned. They may be wrestling with a family problem — or stealing you blind.

Don’t jump to conclusions

The signs of fraud are easy to overlook, in part because they aren’t necessarily signs of fraud. There may be explanations for suspicious behavior that have nothing to do with fraud, but you won’t know unless you investigate further. If you begin to suspect fraud, contact us at 205-345-9898.

© 2019 Covenant CPA

From invoices and payments to discounts and write-offs, many business transactions are recorded to accounts receivable. This makes receivables a popular fraud target. But your business doesn’t have to become a victim.

Common schemes

Receivables fraud occurs when dishonest employees divert customer payments for their personal use. They use various methods, including:

Lapping. This is the most common type of receivables fraud. It involves the application of receipts from one account to cover misappropriations from another. For example, rather than credit Customer A’s account for its payment, a dishonest employee pockets the funds and later posts a payment from Customer B to A’s account, Customer C’s payment to B’s account and so on.

Write-offs and discounts. Instead of crediting a payment to the customer’s account, fraudsters might pocket the funds and then record a bad debt write-off or discount to the customer’s account. Despite the diversion of incoming payments, the customer’s account will reflect the expected current balance.

Prevention tips

Segregation of duties is critical to preventing receivables fraud. This means that the employee who handles incoming payments from customers should be different from the person who handles invoicing. Also consider assigning a different employee to manage customer complaints. Such complaints often increase when receivables fraud is occurring.

In addition, require mandatory vacation time for all employees. Receivables schemes typically require their perpetrators to remain vigilant — and in the office — to avoid detection. For this reason, it’s also advisable to rotate job duties among accounting staffers.

Tracking thieves

When receivables fraud is suspected, a forensic expert will use several methods to uncover illicit activities. For example, the expert might trace a sample of cash receipts to the sales ledger and deposit slips to find discrepancies in dates, payee names and amounts. The expert also may compare deposit slips against the books and send requests for confirmations to a sample of customers to verify current balances and payment histories. Other items that deserve scrutiny are:

  • Bad debt write-offs,
  • Accounts with unexplained credits,
  • Increased customer credit limits, and
  • Random adjustments to the accounts receivable ledger.

To identify perpetrators and find internal control weaknesses, experts often interview employees.

Take control

Even though fraud experts have methods of finding receivables fraud, it’s better for companies to stop these schemes before they start. Contact us for help strengthening your business’s internal controls at 205-345-9898.

© 2019 Covenant CPA