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Forensic Oversight: How CFOs Curtail White-Collar Crime

By Meryl Ravitz

Chief Financial Officers are well-positioned to put a dent in the ongoing trend of white-collar crime.

Overall, 90% of significant thefts come from employees. The average embezzlement loss costs $357,650 and the average company fraud case involving a founder or executive costs about $600,000, according to research from Hiscox and Association of Certified Fraud Examiners.

Unfortunately, these crimes play a significant role in bankruptcies, layoffs and financial statements filled with red flags.

CFOs have a close connection to the C-Suite and the rank and file via the controller. The vital intersection adds even more responsibility to the existing role of financial visionary. Driving the company toward growth often means motivating every team member to row in the same direction.

Consider five proactive forensic tactics that can add a layer of oversight to mitigate white-collar crime:

Separate Responsibilities

Generally, a company will need at least two individuals responsible for handling the money. In other words, the person who brings in the revenue should not be the one who records it. In addition, the person who pays vendors shouldn’t be the one responsible for opening new vendor accounts.

I helped a global provider of long-haul, telecommunications services with a forensic accounting matter when a partner noticed the company had a surprisingly high burn-rate of a recent $2 million investment.

During my research and analysis, I discovered that one of the company’s partners had embezzled $600,000 of the $2 million dollar investment by setting up fictitious vendors, hiding parts of incoming bank statements and accounting for missing money as “vendor deposits” on the books.

As a result, I developed a forensic accounting program that identified the embezzled funds and put in place safeguards to mitigate further incidences of company theft. The initiative included a vendor analysis of tax identification numbers, as well as the vendor’s online presence, delegation of financial responsibilities among several employees and mandatory vacation policy that assisted in a rotation of financial assignments.

Build A ‘New’ Team

Preventing corporate theft and fraud may begin with CFOs but they can’t do it alone. Trusted team members throughout the company must be recruited to be part of the solution. Purchasing agents must ensure true competitive bidding. Warehouse receivers and shippers must use a buddy-system so a second person can verify incoming and outgoing products. Payroll managers must ensure employees are real and accounted for each pay period, which includes working their allotted hours.

Also, instituting surprise audits in every department provides an additional layer of security. In some situations, it ensures that individuals in certain roles are bonded. Fidelity bonds protect employers from the unlawful acts of their employees.

To support the company-wide effort, a strategic, internal communications campaign through the year would reinforce the initiative. Remind your employees how the electronic surveillance cameras in and around the facility help prevent losses, which mitigates job loss. In the weekly employee eblast, add some “fast facts” that speak to the ramifications of employee theft in the workplace.

Know Your Employees

As the world has moved into a digital space, initiatives such as “Know Your Customer” have sprung up in the hopes of preventing privacy theft and money laundering. Well, guess who are your internal customers? Your employees.

A typical fraud case takes 14 months before it’s detected, according to ACFE. So, be proactive with your staff. Are your employees living beyond their means? Maybe they are often absent from work, or are they disgruntled? Are you seeing more non-routine journal entries in the Finance Department? Are certain employees showing a pattern of overriding internal controls? Transactions without supporting documentation need closer scrutiny.

Mind the Money

Every month, a company receives a bank statement. So, who receives it? What happens to it?

The Chief Executive Officer, or an owner of a midsize company, should receive an unopened bank statement every month. It’s a simple act that could eliminate many opportunities for fraud.

Typically, another employee opens the bank statement, which could create a setting where pages from the statement could go missing. That’s when copies of cashed checks could disappear. Invisible ink is a real tool used by fraudsters.

As a deterrent, institute a positive-pay system with your bank so they can request final approval before they clear each check. In addition, keep your checks locked away and stop using stamps or check-signing machines.

Now, reconcile your bank statements each month with another person providing oversight.

To add another layer of security, create a confidential fraud hotline for your employees to act as whistleblowers. According to ACFE, 42% of company fraud cases are reported by a tip from a coworker.

The late British novelist Amelia Barr said it best, “Forethought spares afterthought.”

With some proactive action, CFOs can help add to the bottom line by ensuring that crime doesn’t pay.

(Meryl Ravitz, CPA, RFI is a director at CFO Consulting Partners who supports the firm’s small business, manufacturing, telecommunications, consumer products and nonprofit practice. Her expertise includes many areas in finance, including forensic accounting and internal controls analysis.)