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25 Feb
2013

The Dreaded F Word

Herbein Energy Advisor – February, 2013

Businesses in the energy sector face a number of similar challenges – from staffing problems to regulatory issues to growth concerns. The last thing you want to address is the F-Word.

No, I don’t mean that. I am talking about something worse – Fraud!

Fraud can mean different things such as misrepresenting oneself, false financial statement reporting, theft of funds, etc. Fraud remains predominately an inside job and embezzlement by employees in the United States is estimated to exceed $100 billion annually. Faced with those statistics, I am going touch on the theft of funds and some simple methods a business owner or manager can employ in an effort to thwart or detect this type of fraud even in a small business.

Check Bank Statement and Invoices
Always have your bank statement mailed directly to you unopened. Each month you should review the items included in the bank statement – the payee and amount on checks (including payroll), number and amount of deposits versus your expectations. Also, remember to review automated clearing house (ACH) and wire transfers. It is important to perform this function before anyone else has access to alter the information. While this process may not prevent a theft it could very well detect it. Many of the small business frauds I have encountered could have been detected if this one analysis was performed.

Review invoices and checks after they are processed for payment. Check vendors – they should each be ones you expect to see and amounts consistent with your expectation. Make sure all relevant data agrees with the associated invoice. Do not return this information to the preparer after you have reviewed it. Designate another person in your organization to process and mail the checks and invoices. Do the same for payroll – assure that you know people to whom checks are being issued and dollar amounts are in line with your expectations. This method is more preventive in nature and requires some segregation of duties but you only need three people, including yourself, to make this work.

Cross Train Employees
Require all employees to take vacation and assign another to perform their job while gone. This may involve some cross training which is a good business practice anyway. This method could both prevent and detect fraud. An individual who knows another will perform their duties may be hesitant to commit fraud and often a fraud is detected by a person who performs the job responsibilities of another.

View people with access to cash or other valuable assets with a touch of skepticism. Consider their lifestyle and significant personal expenditures in comparison to their payroll or other knowledge of their personal financial situation. People don’t normally want to lead a life whereby they distrust everyone but it is often revealed in a fraud situation that the perpetrator was trusted like a son, mother, etc.

Be Diligent
None of these preventive processes needs to take a significant amount of time each month and can usually be accomplished in an hour or so. Furthermore, they can be implemented at any small or large business. Diligence is the key. Perform the processes each month and ask questions. Make sure everyone knows you check the data. Fraud normally needs to be conducted in secrecy, and a significant deterrent is when someone knows another is being observant and asking questions.

Unfortunately, fraud does happen more than most realize, and as a business owner or manager it is your responsibility to prevent or detect it. You are the one in the best position to accomplish this and should not necessarily rely on others. The above methods are certainly not all-inclusive and may not prevent or detect fraud but do give you some tools for addressing fraud.

For additional information please contact the author, Joel S. Kunkel.

Joel Kunkel Headshot
Joel S. Kunkel, CPA
Partner
jskunkel@herbein.com
412.392.2345

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