Fraud Detection Made Simple
By Leah Wietholter, MBA, CFE, PI
Fraud risk assessments and detection methods are helpful tools for business owners and other stakeholders, but can also often feel overwhelming. These tools, while created with the best of intentions, can make fraud risks seem infinite and too big for a simple solution. This week, we’re simplifying the concepts of fraud detection to the bare basics. Whether you own a small business, manage a non-profit organization, or are an investigator looking to help your clients, these tips are the simplest starting point for anyone looking to detect fraud.
Focusing on Cash and Fraud Detection
Theft of inventory and equipment and financial statement frauds do create losses to organizations and investors, but for the purposes of this post, we’re focusing on cash sources and uses. We’re going to use the term “cash” to represent literal green paper cash, currency, credit card receipts and payments, Paypal, Venmo, SquareCash, et cetera. In this sense, cash is anything that increases someone’s purchasing power.
Additionally, we’re focusing on detection methods and not internal control improvements. Internal controls can always be improved, but for smaller organizations, the budget often isn’t available to segregate duties as one might like. In light of this, we’re instead providing continuous monitoring ideas that can be reviewed on a regular basis to detect fraud before it spins out of control.
Money In, Money Out Worksheet
Cash is stolen either as it’s being collected by an organization or as it’s being spent by an organization. By identifying the methods by which cash is collected and spent, we can assess the fraud risks and identify corresponding detection measures. Workman Forensics has created a free Excel worksheet to help you brainstorm the different ways cash enters and leaves your organization and identify fraud risks. We’ll use the worksheet as a guide in the following examples.
To download your copy of the Fraud Detection Made Simple worksheet, click here.
Identifying Fraud Risk at the Point of Collection
Example: Steve owns a large plumbing company. One of the plumbers visits a customer’s home, assesses the repair needed, makes the repair, and then charges the customer and receives payment on site. Steve’s company accepts cash, checks, and credit card payments through the on-site plumber.
Identify the methods by which funds are collected by your organization. Most commonly, this is through sales.
List the types of payments your organization receives when it sells something. Typically, this includes cash, checks, or credit cards, but could also include Paypal, Venmo, ACH payments, or wire transfers.
List all of the people who touch the payment prior to being deposited to the bank. If this list is one person long, flag this area! This is the area of greatest risk when only one person handles a sale from payment to deposit.
List when and where these people touch the payment in the process from sale to bank deposit.
Ask yourself: if this person was going to steal funds, where would it happen in the process from sale to bank deposit? List these areas of opportunity in the worksheet fields.
Ask yourself: if this person stole funds, how would you know? List these areas of detection in the worksheet fields.
We’ve completed these six steps for Steve’s plumbing company in the worksheet below.
Areas for continuous monitoring for fraud detection that we would recommend to Steve would include the following on a monthly basis:
Compare the number of appointments scheduled to the number of payments received and recorded in the system.
Identify and research any missing receipt numbers.
Compare revenue expected from completed appointments to deposits made to the bank.
Identifying Fraud Risk as Money Leaves the Organization
Example: Steve works to keep his overhead costs low in his plumbing business. His monthly expenditures include payroll to his technicians and office manager, rent for the office space, repairs and maintenance on the technicians trucks, purchases of small tools, equipment maintenance, office supplies, and office utilities.
Identify the types of expenditures your organization pays monthly, quarterly, and annually.
List the ways in which the expenditures are paid.
List the people who are responsible for authorizing the expenditures.
List the people who are responsible for releasing funds to pay the expenditures. If the person listed in steps 3 and 4 are the same, flag this area for improvement! Also, consider in this step the access this person has to the bank accounts, credit cards, and other accounts in which the company holds funds (Paypal, savings accounts, etc.).
Ask yourself: if this person was going to steal funds, where would it happen? List these areas of opportunity in the worksheet fields.
Ask yourself: if this person stole funds, how would you know? List these areas of detection in the worksheet fields.
We’ve completed these six steps for Steve’s company in the worksheet below.
Areas for continuous monitoring for fraud detection that we would recommend to Steve would include the following on a monthly basis:
Review payroll reports for unexplained increases in hours worked, unsupported reimbursements, and irregularities in vacation, sick, or PTO hours.
Review credit card statements for non-business related charges.
Review bank statements for unexpected and non-business related ACH, debit, and check transactions.
Review the check images accompanying the bank statement for unexpected and non-business related payments.
Review bank statements for extra credit card and utility payments.
When You Find an Anomaly: Next Steps
If any of the monthly review steps reveal anomalies or don’t support what you expected, ask questions and research. Through this fraud detection process, you will be able to reduce the risk of fraud loss to your business. If, as you work through this process, it seems like you are unraveling something bigger than you expected, give us a call. We’re happy to help you identify irregularities, stop the theft, and quantify the loss so you can take your next steps towards recovery.
To download your copy of the Fraud Detection Made Simple worksheet, click here.
For more tips on detecting fraud in your business, check out our podcast minisode, “How to Spot Fraud in Your Financials.”