Thieves in Plain Site: Fraud Found in Payables
Part 4 of 7 Occupational Fraud
By: Mark Palmer, President e:countable, LLC
There are as many fraud schemes relating to payables and the bill paying process as there are dishonest employees that steal from employers. Let’s start by looking at four of the more popular forms of fraud in small business.
1. Legitimate but corrupt vendors. Unlike Vapor Vendors where a bookkeeper or buyer creates fictitious vendors, companies all too often purchase real products or services from legitimate vendors who intentionally overcharge in terms of price as well as quantity. This can happen when a dishonest bookkeeper or buyer gets cozy with a corrupt vendor.
It works like this: You purchase from the vendor. The vendor overbills you. The vendor then pays your employee a kickback as his or her share of the overbilled amount. At times vendors pay employees kickbacks for no other reason than your employee makes sure your company buys from that vendor versus its competitors. This is still fraud and corruption since your employee is making decisions based on what will benefit him (the kickback) instead of what’s best for your company.
2. Taking company property. Any employee with the authority to buy on behalf of the company also potentially has the ability to make purchases of personal items for themselves, paid for by the company. This includes but is in no way limited to buying office supplies, office furniture, computers, product inventory, parts or repairs on company vehicles, security monitoring services, cable TV, coffee or refreshments, cleaning supplies, toilet paper, you name it. This type of fraud is much more difficult to detect since inventory records are not normally kept on most office items other than products purchased for resale.
3. Check Deposits. Another form of fraud occurs when an employee, usually a bookkeeper, properly records payables, properly processes a check run, and properly hands checks to the business owner to be signed. Then he or she then deposits a signed check made payable to a local vendor (usually similar sounding in name) into his or her own account.
The employee fraudulently endorses the check and makes the deposit. So what happens when the vendor doesn’t receive payment? If proper controls aren’t in place, the bookkeeper creates another payable to that vendor and pays it again this time actually mailing it to the vendor. If you are thinking that the bank shouldn’t allow checks made payable to a company or individual to be deposited in another’s account – in reality – the sheer volume of transactions going through the banking system makes it nearly impossible to fully monitor. Even as an honest mistake, companies can receive a check made payable to someone else and accidentally deposit it.
4. Blank Checks. Another form of fraud is when an employee steals blank checks from a company and forges checks for his own benefit. It is because of this that check stock be kept secure, with only limited authorized access, and accounted for properly. Otherwise, anyone, not just a bookkeeper can steal checks.
Here’s an example: A company of about 30 close-knit employees in an office environment got along well and trusted each other. Over time the bookkeeper became less concerned about controls and stopped locking company blank check stock in a safe or other secure location. One day the company received a phone call from their bank. Someone was trying to cash one of their company checks, and it looked suspicious. As it turned out, it wasn’t an employee but someone on the cleaning crew that came in at night. She took the checks from the bottom of the box to avoid being noticed immediately, and she sold them to someone else who forged them.
How can some of this be prevented or detected?
There are also two other security measures to consider. The first pertains to check fraud – one of the most prominent forms of fraud, by anybody. All anyone needs is your bank account and routing numbers to print forged checks on your checking account. Every time you pay a bill by check you are advertising all the information a crook needs to forge your checks.
So what should you do?
Consider using a service provided by your bank called “positive pay” where you provide a file to your bank each check run and they confirm the validity of every check before payment. Also consider paying your bills electronically and using “ACH block”, another service provided by your bank. At e:countable, we process bill payments electronically for our clients in a way very similar to the way payroll processing companies do. Your bank account numbers no longer are out there for the world to see.
The second security measure you should consider? Budgeting and planning. Formulate budgets and compare actual results to that budget as a strong method of detecting fraud of any significance. Many business people look at the budget process as a pain, or pie-in-the-sky thinking. Significant benefits are realized by going through a well structured budget process, particularly when it is facilitated by someone experienced in planning, budgeting, and the development of forecast models.
Benefits include being able to see what your profitability and cash flow look like in the future based on various assumptions and scenarios, holding managers accountable for their performance, providing information to your bank to increase your line of credit BEFORE you’re in crisis mode, and using it as a benchmark to detect overspending which can be an indication of fraud or mismanagement.
If you need assistance, e:countable’s outsourced accounting and CFO consulting services has C-level accounting professionals that can add value to your budgeting and planning process. Let us know how we can help.
NEXT ISSUE: “Taking Ownership – AKA: Liberties Taken by Owners”. While it may not seem possible that an owner can steal from his or her own business, it can and does happen. We discuss some of the many ways that owners can commit fraud in their own businesses. Want to know now? Contact us at: (757) 962-1080
Mark Palmer: Bio