When times are tough, manufacturers should be aware that employee or occupational fraud tends to rise.
March 29, 2011
by Mark Chow and Mathew Lem
When times are tough, manufacturers should be aware that employee or occupational fraud tends to rise. The Association of Certified Fraud Examiners estimates the average company loses 5% of its revenue to fraud and abuse, but the highest losses occur within organizations of less than 100 employees.
Fraud prevention begins with your company’s code of conduct. Foster an environment of integrity and watch for red flags.
Three combined factors drive occupational fraud: opportunity, typically due to weaknesses in an organization’s controls; pressure at home or work from debt issues, divorce, gambling or drugs; and rationalization (“I’ll pay this money back”).
Fraud is also difficult to spot because it comes in many different forms such as:
•Stealing (cash, inventory, supplies, equipment, data)
•Forgery (cheques, signatures on purchase orders)
•Lapping (diverting cash from customer accounts)
•Kiting (drawing against balances credited to uncollected cheques)
•Taking cash receipts intended for deposit
•Recording fictitious transactions
•Falsifying timesheets for higher pay
•Creating fictitious employees and collecting their pay
•Collecting pay cheques of employees who no longer work for the company
•Creating dummy companies, placing false orders
•Fabricating/duplicating/overclaiming expense items
•Issuing false receipts and skimming payments from customers’ accounts
•Taking bribes or kickbacks from vendors
•Falsely billing for products or services
•Taking cheques that are payable to suppliers
•Falsifying financial statements
Typically, the trouble begins with small transactions that become larger and more frequent while the crime is undiscovered. Here are some of those red flags:
Employees. Lifestyle improvements (more expensive vehicle, home, clothes); behavioural changes (may be a result of stress or addictions); personal debt troubles; and a refusal to take vacation or sick leave.
Payroll. High overtime claims; unusual increases in hourly rates; missing or duplicate social security numbers; and employees without payroll deductions.
Accounts receivable. Bank deposit and posting discrepancies; slow reconciliation of bank accounts; disproportionate or unsupported cash transactions; high volume of discounts, returns, voids and credit notes issued; the appearance of unauthorized bank accounts or new activity in dormant accounts.
Non-payment notices. Frequent expense items, supplies, reimbursements and account write-offs; and high employee turnover.
Purchasing. Increased purchasing inventory without corresponding sales; atypical inventory shrinkage; invoices unaccompanied by shipping documents; growing volume of complaints about products; large number of purchases from new vendors; payments made to vendors that are not on an approved vendor list; purchases don’t follow regular procedures or have unusual payment terms; vendor address is a post office box or an employee’s address.
Even when no flags are apparent, keep in mind 85% of companies surveyed in a recent global fraud report were affected by at least one incident in the past three years. Implementing proactive fraud prevention measures protects the bottom line.
Mark Chow is a senior vice-president and Matthew Lem, a vice-president of the Financial Recovery Services Group of BDO Canada Ltd. (www.bdo.ca). E-mail email@example.com or firstname.lastname@example.org.
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Fraud prevention measures
Adapted from the 2010 Report to the Nations on Occupational Fraud and Abuse, Association of Certified Fraud Examiners.