Management overrides of internal controls can make your company more vulnerable to fraud. This is true even when managers have innocent intentions — for example, they don’t feel they have time to follow proper accounts payable procedures because a vendor is requesting immediate payment. Your company is at even higher risk of fraud losses if a senior manager intentionally ignores the rules to manipulate financial statements.
Management overrides of financial controls can be difficult to detect. However, there are several warning signs that a manager isn’t fully adhering to the policies and procedures your organization has adopted. For instance, a manager may fail to call attention to business risks or dispute an auditor’s findings regarding his or her department. A senior manager may be unwilling to discuss issues that could require financial adjustments or insist on releasing overly optimistic reports on current or future performance.
Such behavior doesn’t prove that fraud is occurring. However, it suggests that you need to improve or open new paths of communication and consider retraining managers on the importance of internal controls. If you do suspect fraud, you must be willing to investigate — regardless of whom it might implicate.
To prevent management overrides, build a culture that encourages honesty and supports employees who speak up when they suspect something’s wrong. Think about whether your managers experience pressure that unwittingly encourages fraud. For example, if your industry has seen increased business failures, some employees may think they need to keep profits at specified levels. They might also feel stressed if their compensation depends on achieving stretch goals for cash flow or operating results.
Employees a level or two below senior managers are most likely to observe management overrides. Give them access to a confidential hotline and they’re more likely to report fraud before it seriously harms your business. And if you extend your hotline to vendors and customers, you’ll increase your chances for learning of improprieties early.
A difficult year
This year has been challenging for businesses of every size and in every sector. With many employees working from home and some companies downsizing, managers may be tempted to take short cuts they wouldn’t under ordinary circumstances. Or worse, managers with access to financial statements may feel pressure to fudge numbers to improve your company’s public profile or boost their own compensation. We can help identify flaws in your fraud-prevention program and design policies that even those bent on fraud will have trouble overriding.
© 2020 Covenant CPA
Lapping is one of the most common ways crooked employees skim money from their employers. In these schemes, a perpetrator uses receipts from one account to cover theft from another. Here’s what lapping looks like and how you can help prevent it.
Lapping scams usually start small, with an employee pocketing a payment from ABC company and using a payment from XYZ company to hide the loss. As time goes on, however, the amounts get larger and the employee is forced to maintain detailed records to track the movement of money.
This house of cards usually tumbles when the employee makes an error. One commonly cited example is the man who stole $150,000 by programming an elaborate computer scam based on 29-day cycles. It collapsed because he forgot that February normally has only 28 days.
As with any fraud, there are usually warning signs that can alert you before a minor lapping scheme grows to epic proportions. These include excessive billing errors, accounts receivable writeoffs, decreasing accounts receivable payments and accounts receivable details that don’t agree with the general ledger.
Customer complaints are another red flag and always merit investigation and follow-up. Also look closely if you see delays in posting customer payments.
Often, lapping signals that a business has inadequate internal controls. The man who stole $150,000, for example, was his company’s chief programmer and had unlimited access to customer accounts. To ensure lapping doesn’t tempt greedy or desperate employees, take a few simple preventive measures.
Have someone review and compare every check that’s deposited to the receivables ledger. This takes a little time but can offer a big payoff. Better yet, require that two people review the records. To be truly effective, the review should include the actual checks, not just ledgers. Because employees who are lapping may set up their own accounts in the company’s bank, it’s important for reviewers to have a list of valid accounts by bank name and number for authentication.
Another easy protection is to closely monitor aging accounts. If you routinely send overdue notices to customers, pay attention to the responses. When customers say they’ve already paid an invoice, for example, follow up.
As with most occupational fraud schemes, internal controls are essential to help prevent lapping. If you suspect fraud is occurring in your organization or need to strengthen your controls, contact us.
© 2019 Covenant CPA
Even if you haven’t heard much about it lately, know this: Health care fraud is alive and well in the United States. Here’s a roundup of recent stats, law enforcement initiatives, common fraud schemes and how you can help prevent these crimes.
Just the facts
During fiscal year (FY) 2018, the Health Care Fraud and Abuse Control Program (a government initiative that coordinates federal, state, and local law enforcement) won or negotiated over $2.3 billion in health care fraud judgments and settlements. During the same period, the Department of Justice (DOF) opened 1,139 new criminal health care fraud investigations. In addition, the DOJ filed charges in 572 criminal cases.
What does this mean for you? The National Health Care Anti-Fraud Association estimates that health care fraud costs the nation at least $68 billion annually.
Many players, many games
Health care fraud can be perpetrated in a variety of ways by many different players. For example, insurance companies may bilk government programs such as Medicare and Medicaid by submitting false documentation, mishandling claims, charging excessive rates or failing to pass along discounts.
Fraud by insured employees is another problem. Employee-initiated schemes include submitting fraudulent claims — often in collaboration with shady medical providers.
Dishonest providers, including doctors, nurses, chiropractors and pharmacists, are responsible for a large volume of health care fraud. They may bill for unnecessary or harmful medical procedures, bill for procedures never performed, “upcode” inexpensive procedures to expensive ones, or bill for brand names and dispense generics. Corrupt practitioners may recruit healthy individuals and bill their insurance companies for costly medical services that are never provided.
What you can do
Fraud thrives in high volume environments. So, the more health care transactions your business or organization processes, the greater the potential for fraud to slip through undetected, and the more vigilant you must be.
You can help combat these schemes by strictly complying with audit obligations. For instance, randomly sample products and services invoiced and compare them with what was actually delivered to the patients. Looking for discrepancies can net you stolen goods and even large-scale thefts. It also sends a message to potential perpetrators that you’re watching.
Role of internal controls
In addition to contractual audits, internal controls play an important role in preventing and uncovering health care fraud. Contact us if your organization needs help building a robust internal control system.
© 2019 Covenant CPA