As a Certified Fraud Examiner, I have investigated dozens of employee embezzlements that occurred at small businesses. Many of those embezzlements were committed by bookkeepers through disbursement fraud schemes.
The most common disbursement frauds include using company checks to pay the bookkeeper’s personal bills (credit cards, utilities, telephone, etc.), charging personal purchases on company credit cards and in some cases, writing company checks payable to the bookkeeper. In many of the cases I have investigated, the perpetrators were long-term employees who were trusted by the small business owners.
Small businesses tend to be more vulnerable to fraud as they typically have only one or two employees handling the accounting for the entire company, and they tend to have fewer anti-fraud controls in place compared to larger companies. It is difficult to have segregation of duties when you have only one or two people handling all the accounting functions. If your accounting department consists of one bookkeeper, that individual will have to process invoices for payment, prepare the checks, record the checks into the general ledger, and reconcile the bank accounts.
Let’s look at some fraud prevention best practices that you should consider implementing in your business.
Limit authorized check signers to owners or a key executive who is not involved in the accounting functions. Do not give check signing authority to the bookkeeper.
Do not use signature stamps. They can be dangerous if they fall into the wrong hands.
Require two signatures on checks above a certain dollar amount.
Require that supporting documentation (original invoices, receiving tickets, purchase orders, etc.) accompany all checks presented for signature, and review all such documentation prior to signing the check.
After signing the checks, mail them directly or give them to another employee to mail. Do not return signed checks to the bookkeeper, as that would create an opportunity for the check preparer to alter the check (change payee, change dollar amount or add information such as a personal account number to the memo section of the check).
Limit the number of company credit card users, limit the types of purchases allowable on company credit cards and establish spending limits for company credit cards. Consider setting up separate accounts for each card holder. Do not allow for cash advances on company credit cards.
Review each credit card statement prior to signing check for payment of bill, looking for purchases that do not appear to be for company business expenses such as clothing stores and grocery stores.
Periodically, request supporting documentation for specific charges that potentially could include business or personal items. For example, a charge for purchases from an office supply superstore may appear to be for business expenses, but upon reviewing the details on the invoice you could find purchases of personal items such as video games, children’s movies or home computers. For businesses that use Amazon to purchase legitimate business items, the charges should be reviewed periodically to ensure that the account isn’t being improperly used for personal items.
All company bank statements should be opened and reviewed by an owner or key executive prior to giving the statements to the bookkeeper to reconcile the bank accounts. This could be controlled by having the bank mail all account statements to an owner’s home address. As an alternative, if someone other than the bookkeeper opens and distributes the company’s mail, that person could be instructed to give all mail received from the bank to the owner unopened.
An owner or key executive should review all bank statement activity looking for anything that appears unusual, such as payments to an unknown payee, payments of unusually large dollar amounts, alterations on canceled checks, handwritten notations on canceled checks (such as an account number that may have been added after the check was signed), forged signatures, unusual endorsements or unusual electronic funds transfer activity.
If a canceled check appears suspicious, review the endorsement information on the back of the canceled check to determine where and by whom it was negotiated.
Interbank transfers should be reviewed to make sure the transfers were made to other company bank accounts.
Review monthly financial reports for expense account balances that reflect unexpected increases above budget or prior year amounts. Obtain a detailed print out of all activity in any such accounts and review for unusual activity.
Typically, fraudulent disbursements are recorded to high volume expense accounts so the impact of the bogus transaction is not noticed. Periodically conduct surprise audits of activity within high volume accounts.
Employees who commit fraud are motivated by some type of financial pressure and while committing a fraud, the employee will typically display certain behavioral red flags that can be a warning sign that fraud is occurring.
The most common behavioral red flags include:
Living beyond means
Experiencing financial difficulties
Unusually close association with a vendor
Control issues, unwilling to share duties
Refuses to take vacations
The impact of a fraud loss on a small business can be devastating. In many cases, disbursement fraud schemes occur in small businesses due to a lack of controls and a lack of management oversight and review. Implementing the tips listed above will provide a level of controls, management oversight and review over the company’s disbursements that will greatly increase the ability to prevent and detect fraudulent disbursements.
Our team of Certified Fraud Examiners can help determine how a fraud was committed and how the perpetrator concealed the fraud. Contact us here or call 800.899.4623.
This article was originally published in February 2014 and was updated in March 2024.