Let’s be honest — preventing accounts payable fraud is not necessarily on the forefront of every company’s mind. Yet it certainly jumps to the top of the discussion after an event occurs. Realistically speaking, not every company has the resources available to set up an elaborate system of internal controls that detects and prevents fraud at every turn. For most privately-held companies, the system of cash disbursements involves only a handful of people. However, there are several areas that warrant particular attention.
A key aspect to having a good system of internal controls, regardless of the company’s size, is having a mechanism to sever any one of the three legs necessary to commit fraud — opportunity, motivation, and rationalization. If one of these legs doesn’t exist, then in theory, neither does the fraud.
First, implement a few solid safeguards. Ideally, having different people involved throughout the cash cycle is the best way to address accounts payable fraud. Here are a few key controls to consider for implementation:
- Segregate duties where possible. It is never a good idea to have just one person involved in a process. If resources are limited, you should include management or owner oversight.
- Periodically have the unopened bank statements come directly to an owner or another member of senior management. The owner should review the bank statement for any unusual items and ask a few questions. This not only is a good way to catch anything out of the ordinary but also lets everyone know you are paying attention.
- Have a ceremonial burial for any signature stamps. Signature stamps allow anyone access to a verified signature, which is a bad combination with blank checks or contracts. A good system of internal controls does not allow such a convenience.
- Make sure you see the actual invoices that are being paid. Oftentimes, checks are presented to an owner for signature without any backup and owners do not exactly know what they are paying for.
Second, be sure you are hiring the right people. This means doing proper background and reference checks, especially on those individuals who will be asked to process cash in some capacity within an organization.
Lastly, you should be monitoring the people you hire. A good employer knows what his or her personnel are dealing with not only on a professional level but also on a personal level. Most fraud starts out as a way to deal with a temporary personal situation. Also, watch for sudden changes in lifestyle with new clothes, a new car, or even a new attitude.
At the end of the day, it is all about risk management. Even if you employ just a few of these strategies, you stand a better chance of preventing accounts payable fraud than if you do nothing at all.
Steven E. Staugaitis can be reached at Email or 215.441.4600.