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North Bay Business Journal

Monday, February 25, 2013, 6:25 am

Breaking the ‘fraud triangle’ at your business

By Meredith Rennie

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    Meredith RennieOur local community has been hit hard recently with numerous cases of workplace embezzlement or theft. In a time where our country is muddling through a recession to recovery, more and more schemes are being uncovered.

    Not only have small business owners been impacted, but our nonprofit community as well. As I watch this unfold in my community, I am disheartened because so many cases of fraud could have been prevented through education and implementation of basic fraud prevention control procedures.

    One of my early career staff assignments as a accountant in a public accounting firm involved serving as interim controller for a busy construction company. I was replacing a longtime employee who had been caught “padding” her paycheck, a common fraud scheme. Each day this former employee arrived by 9 a.m. and left by 4 p.m. but somehow was able to accumulate 10-plus hours of overtime every pay period. An attentive general manager noticed a discrepancy between those payroll records and the actual workplace attendance, started to track comings and goings, and was able to catch this embezzlement before it became financially disastrous.

    As a CPA, I am required to complete eight hours of fraud training every two years to be sure I am up to date on what schemes are currently out there and what is trending. What we have been seeing in the industry is reflected in the local cases, covering an array of fraud schemes.

    Common fraud schemes include:

    • Skimming: Pocketing cash coming in to the business before it is recorded in the “books.” This is very hard to track. A common target is a retail operation where customers pay at point of sale or pay on account in person.
    • Lapping: Using overlapping transactions to conceal a fraud. One customer’s payment is used to cover another then another, and so on.
    • Padding the paycheck: Adding extra hours to the timesheet, often generating overtime pay at higher rates.
    • False vendors: Creating a fictitious vendor and doctoring invoices for payment like any other vendor.
    • Check tampering: Forging or altering an outgoing check then depositing it in one’s bank account.
    • Credit cards: Misusing company credit cards to pay for personal expenses.

    The fraud schemes may vary from business to business. However, they have three elements in common: motivation, rationalization and opportunity — “the fraud triangle.” The offender needs to have motivation to commit the crime. With the economy sluggish, foreclosure a common-day term, many families have been hit hard giving the motivation to steal.

    Rationalization is a little tougher; one has to be able to overcome a guilty conscience. The fraudster must self-justify why they should steal. Often the rationale is that there are no other options. The circumstances leading to fraud can involve a sick family member, a job loss in the family and the continuing need for money to finance a lifestyle. When opportunity presents itself, temptation can trump judgment.

    Break the fraud triangle by removing one of the three elements: motivation, rationalization or opportunity. The business owner is most in control of the opportunity element.

    How can small business owners implement reasonable internal controls to remove opportunity from the fraud triangle to reduce their risk of fraud? It may not be as hard as you might think. Here are some simple, low-cost suggestions to implement in your business to reduce your risk of fraud.

    • Do a background check for persons in a financial role.
    • Eliminate access. Use a safe or locking filing cabinet to store blank checks.
    • All bank and credit card statements go to the owner — unopened.
    • Use unique logins and passwords on computers with financial records as well as unique logins for online banking access.
    • Use security cameras over areas where cash is handled. Even a fake camera can deter the potential thief.
    • Require time off for persons with responsibility over financial information. You would be amazed at how many fraud schemes are uncovered while responsibilities performed by someone else.
    • Periodically review a check register or cash-disbursement schedule. Be aware of normal cash outflows, and question anything out of the ordinary.
    • Periodically review your vendor listing. Be aware of who you do business with, and question new vendors or anything unusual.

    Even with implementing some of these simple steps to deter and prevent fraud, nothing is more effective than a business owner who takes an interest in the financial aspects of the business. In addition, business owners can ask their accountants for support and training on how controls can be implemented in a way that makes sense for a given business size and structure.

    Meredith Rennie is director and owner at Zainer Rinehart Clarke CPAs. Based in Santa Rosa, the firm also has offices in Sonoma and St. Helena.

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