CHAPTER 1: INTERNAL CONTROLS
Example: A cash application staffer had a gambling problem, and after going through all her own money she started taking customer checks from her company—after she posted them but before they went to the bank to be deposited. She was sure that one day she would win big and be able to pay it all back. At the time, bank statements were not being reconciled. However, eventually the company hired accounting employees who knew the importance of reconciling the bank statements to the AR balance, who found the discrepancies. This resulted in the cash application staffer being fired and arrested, but not before the theft of hundreds of thousands of dollars that were irrecoverable. While moving to electronic means of payment can reduce the occurrence of fraud, it will not eliminate it altogether, as fraudsters are also making the switch from checks to electronic payment means. But it will eliminate this type of paper check fraud.
WARNING SIGNS OF FRAUD There are a number of red flags to look out for to detect potential instances of fraud:
Abnormally high inventory shrinkage; Declining revenue; Employees living beyond their means; Low loyalty, morale, and work motivation;
An employee who never takes a day off, comes in early, and stays late; An employee with extreme personal issues: financial problems, gambling, excess drinking/drugs; and Lack of, weak, or loosely enforced internal controls.
PREVENTION Efforts to prevent employee fraud should include the following controls:
Segregation of duties; Proactive monitoring of data;
Reconciliations, including sales, inventory, billing, and AR; Performing detailed background checks on new employees; Use of confidentiality agreements and/or non-disclosure documents; Educating employees about fraud, common fraud schemes, and the negative effect of fraud on the organization;
Performing both regular and surprise audits; Implementing an anonymous fraud tip line; and Questioning when a process or activity does not seem “right.”
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THE ACCOUNTS RECEIVABLE SPECIALIST CERTIFICATION PROGRAM E-TEXTBOOK
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