Employee embezzlement and check fraud: Protecting your organization

When it comes to safeguarding your business from embezzlement or check fraud, it's true that "an ounce of prevention is worth a pound of cure."

You cannot prevent people from trying to commit fraud against you, but you can take steps to minimize the financial impact.

The cheapest way to deal with embezzlement is to simply prevent it from happening. One of the best ways is to institute strong internal controls, the "checks & balances" that prevent one person from having too much responsibility over desirable assets, such as cash or inventory.

What if I already have strong internal controls in my organization?

If you believe that you have strong functioning internal controls, consider these three questions:

– How do you know your internal controls are strong?

– Who is telling you that your internal controls are strong?

– When is the last time you had a "controls checkup?"

Most organizations will answer these three questions by saying their finance department is responsible for internal controls. While having your finance leaders involved in the internal controls process is a good idea, it is generally a bad idea to give the finance department sole responsibility for controls. An organization's owners or board of directors should have the final say when it comes to internal controls.

What is a "controls checkup?"

A controls checkup is a detailed review of your organization's internal controls. It's designed to identify issues that expose your organization to fraud or embezzlement risk. A controls checkup should be conducted by an expert with experience in the proper design of internal controls.

One of the common findings of the checkup may be that certain individuals have too much responsibility for company assets. The checkup may also recommend that you use a CPA or banker to perform certain accounting functions, such as the bank reconciliation.

I already have an annual audit, so why do I need a controls checkup?

Annual certified audits are not the same as a controls checkup. Audits are designed to reveal material errors in annual financial statements. A controls checkup focuses on identifying weaknesses in the underlying internal controls that protect the organization's assets. A checkup may also include some testing of internal controls to monitor if existing controls are functioning.

These significant areas only receive minor attention during the annual audit. Addressing the issue of internal controls and fraud prevention through a controls checkup will protect you and the organization you have worked so hard to build. The commitment on your part can be minimal and you will feel much better for having taken the time.

Will my organization's internal controls help prevent check fraud?

Unfortunately, even if your organization has strong internal controls, a fraud can be perpetrated by individuals outside of your organization. Check fraud and counterfeiting are among the fastest-growing problems affecting the nation's financial system. These crimes produce estimated annual losses of $10 billion and the problem continues to rise at an alarming rate.

More common forms of check fraud include the following: altered checks, check washing, check kiting, forged signatures, forged endorsements and counterfeiting of checks.

Does my bank cover check fraud liability?

Not always. Check fraud could be the liability of the business. The Uniform Commercial Code (UCC) has changed in the past several years.

Banks are starting to refuse to pay for fraudulent items if it can be proven that the client was negligent or did not report the fraud in a timely fashion. Check fraud prevention is far easier than waiting for reimbursement from your bank and less expensive.

How can I learn more about internal controls and fraud prevention?

National City Bank and Dennis, Gartland, & Niergarth P.C. will address these issues at a June 9 two-hour seminar, sponsored by the Traverse City Chamber of Commerce.

Topics include recent embezzlement cases in Northern Michigan, check fraud, and the Top 10 Ways to Prevent Employee Embezzlement. Contact Novik at 946-1722 or Emerson at 935-1239 for details.

Mike Novik is a CPA with Dennis, Gartland and Niergarth PC. He specializes in fraud prevention and fraud detection services; 947-1722, mnovik@dgncpa.com

Steven Emerson is a Vice President and Certified Treasury Professional (CTP) for National City Bank's Global Treasury Management division. He works with businesses, municipalities and non-for-profit organizations; 935-1239, steven.emerson@nationalcity.com.