Articles

Prevent Payroll Fraud and Money Theft at Your Business

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Did you know?

Tens of thousands of businesses fall victim to payroll fraud and other money-stealing activities each year. It could be an employee, vendor or even a partner, or a combination thereof, who takes part in these activities. (By the way, even the police are not above the law when it comes to payroll fraud, as two New Orleans officers were charged with committing payroll fraud. Click here to read this story.)

Here are some staggering facts about fraud and money theft:

  • $8+ billion is lost or stolen from small businesses every year (FBI).
  • In 84% of cases, money was stolen before the fraud was detected by the bank (Ponemon Institute).
  • 60% of businesses that suffer business identity fraud close their doors within 1 year (Wall Street Journal).

The early warning signs of payroll and money theft

Payroll and money theft begins with a person(s) secretly acting in a way to steal. There are common signs you should be cognizant of as a business executive.

Do your financial staff display any of these signs?

Unwillingness to share duties: Be aware of in-house accountants and bookkeepers unwilling to delegate responsibility. (This is because they can hide their own deceptive behavior.)

Past problems with credit, gambling, theft or addiction: Keep an eye out for people who have these types of past and current problems; especially if they involved theft or fraud of money.

Poor payroll and accounting records: Even if a person tells you he or she is too busy to keep accurate records, this could be the early signs of payroll fraud and money theft.

Red flags of possible payroll fraud and money theft

Your bank and credit card statements are not reconciled: Look back at your last 90 days or entire year and ask if 100% of your statements are reconciled. Additionally, actually look at the underlying reconciliations for any unusual reconciling items.

You have one person handling 100% of your books, check writing and check disbursements: Don't place one person in charge of all tasks, as it gives them too much opportunity to commit fraud. If you do only have one person, hire someone else to come in each month or quarter to check the books, checks and cash flow. This will prove invaluable to your business.

Your payroll checks are inconsistent: If you are seeing payroll checks with no taxes being withheld or deductions, you need to determine why. Also, make it a policy to not give a payroll advance or petty cash or travel expenses beyond airfare and hotels. You should also look for line items for bonuses, back pay and other unusual items.

You see unexplained higher labor costs or expenses for certain categories: Look at your company's P/L report; do you see an increase in vendor activities? If you do, start questioning everything and review the documentation of checks and charges. Small charges slipping through financial activities can add up quickly.

You see cash inconsistencies: Business who receive cash need to take certain precautions, like the installation of cameras and a set time to take cash from the drawer. If you notice cash discrepancies, there is a good chance fraud is happening.

You hear about staff financial problems or unusual personal expenditures: Are you hearing about financial problems from your staff members? Conversely, are you hearing about a new remodeling job someone is doing? Keep an eye on your financials, as this could be the beginning of financial temptation.

You see a change in vendors and suppliers: If someone in accounts payable replaces a vendor with someone they know, it should be an automatic red flag for you. You should also look at their invoices and question what is being purchased or supplied as a service.

Your financial reports just don't seem right: Reveiew your internal financial records often as they can be an indicator of something amiss. If your revenue or labor rate to revenue is off, consider further investigation.

Executive summary

Businesses have fewer protections than consumers do when it comes to theft. In addition, banks and creditors are not required under law to cover losses from financial accounts, payroll systems or credit accounts. To help keep your business from becoming a fraud statistic, take the steps now to ensure your books are up-to-date and reviewed by an independent third party every 30 to 90 days. Do this, and you will be well on your way to minimizing theft at your business.

Cindy McSwain

Senior Vice President
Outsourcing Services

Cindy McSwain leads AGH’s outsourcing services group. Her team provides payroll, accounting, funds disbursement, controller, and other financial outsourcing services to numerous clients throughout the U.S. Prior to directing the outsourcing group, Cindy served AGH’s audit clients for 10 years, working with a wide range of middle-market, closely held and family-owned clients.

Her current clients cross many industry sectors, including manufacturing, distribution, restaurants, retailers, medical, and not-for-profit. She has participated in numerous SEC filings and public registrations and has experience in mergers and acquisitions. Cindy is a certified public accountant and a member of both the American Institute of Certified Public Accountants and the Kansas Society of Certified Public Accountants.

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