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FIVE PLACES TO BE ON THE LOOKOUT FOR FRAUD By Christina Solomon, CPA/CVV, CFE, CGMA and Michael J. Devereux II, CPA, CMP, Mueller Prost
F
raud takes on many forms, resulting in substantial financial losses and exposing your company to undue risk. Fraud can be perpetrated by internal sources – those employees, managers and even owners who are implicitly trusted, yet this group historically has caused losses exceeding a median loss of $240,000 per instance of fraud because they are able to circumvent or override existing controls that are in place. Your business also can be targeted by external sources, which may include your suppliers, customers or contractors looking primarily to overcharge for materials or services that may not have been provided, were provided but improperly billed or do not otherwise meet specifications. Furthermore, your employees also may be unwittingly put your business’s confidential information and reputation at risk, by falling victim to attacks by cyber criminals. Because of the varied ways, reasons and opportunities for fraud, a good defense is your best strategy to deter and identify fraud within your company. In this article, we explore five areas to be on the lookout for fraud in your plastics company.
1
The work floor
Your employees can commit fraud in many ways, but the greatest opportunity often exists with timekeeping matters and the theft of physical and intangible assets.
Timekeeping fraud occurs when an employee mischaracterizes the hours they worked or took as paid leave. Strong internal controls regarding clocking in/out, and supervisory review and approval of leave requests are important to control any potential misuse or abuse by your employees. Brainstorming ways employees can work together to cover for each other, or collude, will help identify weakness in the process that should be strengthened. Automating processes so that key tasks can increase the effectiveness and efficiency of controls that are implemented, along with periodic testing, can ensure that those controls are operating as intended. Your organization’s physical assets are at risk of theft or misuse by your employees. Commonly, one or more employees may identify that certain goods can be taken without notice and sold to third parties on various social media marketplaces. While physical controls, such as surveillance cameras, are an important element to deter and
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detect, strong inventory controls are even better. There are two main types of inventory controls. The first is to control the physical movement and access to inventoriable assets, which commonly includes designated locations by inventory type, barcoding and restricted physical access to products with high-dollar value, fungible or at greatest risk of theft. The other type of inventory controls relates to performing cycle counts, periodic inventories and using data analytics to identify unusual trends in the purchasing, usage or scrap of inventoriable goods. Theft and use of intangible assets can occur just as easily. This can range from the theft and sale of the company’s proprietary information to the use of the company’s design software licenses to perform services “on the side.” Internal controls can be developed that can deter and mitigate the use of these assets.
2
The accounting office
The accounting office is a hot spot for fraud in any industry, and fraud risks are compounded when one or two trusted employees are responsible for sensitive jobs. The danger is even greater when these same employees have administrative access and password control to manipulate the accounting system, as well as control over financial reports. Over 14% of fraud committed by employees occurs within the accounting department, with a median loss of over $200,000 per instance. Fraud perpetrated by your company’s accounting department can be very complicated and well-concealed, but most often it is hiding in plain sight. The following are common fraud schemes affecting the manufacturing industry and simple strategies to help you identify and deter them. Ghost Employees. An employee with the control to create a new employee in the payroll system, record and submit payroll, and make changes to the payroll master file easily can create a false employee, increase amounts or fail to terminate an employee. Direct deposit or mailing information easily can be updated. While it is a best practice to segregate the duties outlined above, it may not be practical to do so. If this is the case, having another person reconcile the payroll registers between pay periods and/or reviewed against a simple list of verified employees would be advised. In continued on page 16
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