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Fraud Prevention Tip #22: Look for Fraud Indicators, Symptoms and Red Flags

In business organizations, fraud often leaves clues in the records. These clues are called indicators, symptoms or red flags. They are the visible signs that something is wrong. And they are the signposts employees need to point out where to look and exactly what to look for in their efforts to prevent and find theft, wrongdoing and outright fraud.

Here are 15 examples of common fraud indicators. If you see them in your work, don’t overreact. But don’t ignore them either. Insist on more details and deeper support.

1. Missing or inadequate documentation
2. Unavailability of other than photocopied documents when documents in original form are expected to exist
3. Significant unexplained items on reconciliations
4. Inconsistent, vague, or implausible responses to your inquiries
5. Discrepancies between your entity’s records and the records of third parties
6. Missing assets, including inventory
7. Transactions not recorded in a complete or timely manner, or improperly recorded as to amount, accounting period, classification or company policy
8. Supplier and contractor invoices that have been altered
9. Invoices with the same address or phone number as employees
10. Amounts of transactions fall just below the threshold for review
11. Disbursements are unsupported by invoices or other documentation
12. Complaints from customers, suppliers, competitors, bid losers, former suppliers and anyone else who would be in a position to know if something wasn’t right
13. Vendors with an inordinate business volume for no apparent reason
14. Prices from a vendor are unreasonably high when compared to others
15. Anything physically impossible, including overtime, quantities stored, or credits to customers where no sale was ever recorded

This list is just the tip of the iceberg. Your list should include anything you know in your gut just doesn’t look or feel right.

Regardless of the source of your concern, chose to dig deeper to find out why. Insist on answers. And if needed, refer your suspicions to those with audit or investigative authority in your organization.

John J. Hall, CPA

John J. Hall, CPA

John J. Hall, CPA, is an author, speaker and results expert who presents around the world at conventions, corporate meetings and association events. Throughout his 35-year career as a business consultant, corporate executive and professional speaker, John has helped organizations and individuals achieve measurable results. He inspires audience members in corporations, not-for-profit organizations and professional associations to step up, take action and “do what you can.”

 

 

fraud deterence

Fraud Prevention Tip #21: Four Daily Behaviors at the “Anti-Fraud Moment”

Supervisor Mike said, “Just cut to the chase. What exactly should I be doing every day to deter fraud on my watch?”

OK – here you go Mike. This is as simple as it gets.

Fraud is deterred at what I call “The Anti-Fraud Moment”. This moment occurs every time you have a pen in your hand and a document in front of you to approve.

Example documents include:

• Employee time sheets
• Supplier invoices
• Out of pocket travel expense reports
• Journal entries
• Bank reconciliations
• Contractor monthly payment applications
• Purchasing card transaction receipts
• Month end budget to actual operating or cost reports
• Point of sale cash register overrides
• Inspection reports
• Exception and variance reports
• Inventory control reports
• A new lease
• Joint venture agreements
• Loan documents

The actual list of documents that the typical employee, manager or executive signs each day is enormous. But they all have one thing in common. The act of physical approval is the true choke point in any fraud deterrence, prevention and quick detection effort.

So if this common activity is the moment of attention, then what is the ‘cut to the chase’ activity we want from approvers?

Four words: Look, Ask, Doubt, and Resolve.

1. LOOK. Actively scan the document and related support for what doesn’t look or feel right to the approver. Managers and staff who review and approve any document day in and out are in the best position to know when something strange, odd or curious is presented for their signature.

2. ASK. Consciously ask yourself “HDIK?” – How Do I Know that this document right here in front of me right now is correct? Not the time sheet or invoice I approved yesterday or last week. This one I’m about to put my signature and reputation on right now. On what basis do I know this time sheet is correct?

3. DOUBT. When in doubt, doubt. Not when in doubt, believe! Doubters see something that catches their attention and choose to double check details before signing. Just in case. Believers see something strange and just say, “It’s probably OK” and sign without checking.

4. RESOLVE. If you have looked, asked HDIK, and checked details when it doesn’t look right to you, the last step is to positively resolve your suspicions one way or the other – or refer the issue to those with the background and authority to investigate.

Four simple active steps at the moment of approval. Look, ask, doubt and resolve. If you can get everyone to do those four things, fraud deterrence, prevention, and quick detection is a snap.

John J. Hall, CPA

John J. Hall, CPA

John J. Hall, CPA, is an author, speaker and results expert who presents around the world at conventions, corporate meetings and association events. Throughout his 35-year career as a business consultant, corporate executive and professional speaker, John has helped organizations and individuals achieve measurable results. He inspires audience members in corporations, not-for-profit organizations and professional associations to step up, take action and “do what you can.”

 

 

blind trust fraud prevention

Fraud Prevention Tip #20: Determine Why Anti-Fraud Controls Break Down

Hands down. Not even close. The number one question asked during my live fraud prevention seminars is (drum roll please!):

Why Do Anti-Fraud Controls Break Down Over Time?

From my work with clients, here’s a list of ten reasons why controls break down. How many do you have today? And as you keep score, here’s a hint – the effect of these weaknesses is cumulative. The more you have, the greater the risk of anti-fraud control failure.

1. Executives, managers and employees simply don’t understand the control implications of what they do. Do you have people who don’t understand the control purpose of policies, procedures and reports they see every day? People who don’t know the questions they should be asking? Yes or no?

2. Reviewers who don’t have the information they need to know whether the transactions they’re reviewing are proper. Do you have people who routinely approve invoices from vendors and suppliers but have never seen the underlying purchase order or contract? A client’s executive once told me, ‘I review invoices in our international operations written in a language I don’t understand. But they look reasonable compared to what we paid last month.’ Do you have any situations like this?

3. Not enough time. Do you have people who don’t have enough time to perform the control procedures completely? I’ll save you the trouble. The answer is “YES! – We have this problem.” Every major business, every small business, every not-for-profit, every school district, bank and credit union has the challenge

fraud detection and deterence

We’re happy to answer your questions – and we’d love to hear your story!

of not enough time. Not enough time is a huge weakness in anti-fraud controls.

4. Blind trust. Do you have people who blindly trust what’s put in front of them? That manager who signs anything given to him or her as long as the paperwork looks straight, but they don’t really understand the underlying details. Remember these risks are cumulative. There is a compounding effect. When we don’t understand, don’t have the information, and blindly sign everything put in front of us, control failure is the inevitable result With each ‘yes’ answer on this list, the situation gets worse.

5. Willful blindness. Do you have people who choose not to see a problem? I call this willful blindness. “I choose not to see problems. I have subordinates who report to me who approve anything, but I choose to do nothing about it. Because, let’s face it, you can’t fight City Hall. It’s just the way that it is.” That old excuse has been thrown at us too many times by people who willfully choose not to see problems. And important anti-fraud controls fail as a result.

6. The process mentality. Do you have critical positions that are so process-oriented that it’s difficult for the people performing those tasks to stop and look at each individual transaction with any degree of precision? People who enter data. People who approve travel expenses or journal entries over and over and over, dozens of times a day. The process mindset is, “I’m so busy keeping up with the process, I don’t have time to look at the quality of what I’m doing.” And there are many positions in both large and small organizations where the process takes over. Everyone is in a little bit of a trance and they fail to pay attention to the details simply because of how busy they are.

7. Not questioning the strange, odd and curious. Do you have people who don’t question strange, odd and curious of things that are put right in front of them? That manager who sees something that doesn’t quite look right, a variance report, a month-end report that tells them there is a problem, but they choose to do nothing about it. Do you have people like that in your organization? Yes or no?

8. Not enforcing documentation requirements. Do you have people who don’t enforce documentation requirements from vendors and contractors? They say, “I know these guys. It’s probably okay. I trust them, so I don’t need all the documentation behind it.” Or, “That wire transfer is okay to send out because I know who requested it.” Can you think of anyone like that? Yes or no.

9. Inadequate prevention and detection skills. Do you have people with inadequate prevention and detection skills? I’m going to guess the answer to this one is “YES”. Because when I ask client employees and managers if their organization has ever taught them in a meaningful, deep way what they need to know to fight fraud in what they see in their business transactions, they say no. Over 95% of the time. A lot of them put their hands up when I ask the follow-up question: Have you been given awareness training where the central message was ‘pay attention to what you see, speak up when something doesn’t look right.’ But in-depth training? Real skill knowledge? Maybe one in twenty. Usually less.

10. Intentional override. Do you have people, perhaps a division or location manager, who intentionally overrides the rules? Who say by their actions, “These rules don’t relate to me. I’ve been here long enough. I’m high enough up in the food chain or the corporate pyramid. I can override the standard procedures because of my position or my length of service.”

How many of these ten weaknesses do you have?

Think – what’s the cumulative effect on fraud prevention

and fraud risk management?

If you know you have these weaknesses, it’s time to step up actions to replace them with Better! controls, Better! behaviors and Better! actions. Let us know if we can help.

John J. Hall, CPA

John J. Hall, CPA

John J. Hall, CPA, is an author, speaker and results expert who presents around the world at conventions, corporate meetings and association events. Throughout his 35-year career as a business consultant, corporate executive and professional speaker, John has helped organizations and individuals achieve measurable results. He inspires audience members in corporations, not-for-profit organizations and professional associations to step up, take action and “do what you can.”

 

 

Fraud Prevention Tip #19: The Importance of Effective Screening

Fraud Prevention Tip #19: The Importance of Effective Screening

Terry’s hand shot up. “I’ve heard our internal auditors talk about the need for ‘effective screening’ for years – but no one seems willing to go into detail about what it means. What should I be doing? What specific actions should I take?”

Great questions from a truly concerned supervisor. So let’s break it down for her and for you.

The anti-fraud control of effective screening covers fact and background checking on people, business relationships, commitments and transactions. For example:

  1. New employees. Screening includes verifying all relevant details of the person’s background, experience, education, references, certifications and any
    Fraud Prevention Tip #19: The Importance of Effective Screening

    Ready to be the best you can be? You don’t have to make changes. However, you are responsible for the quality of your life. To achieve the degree of quality you want, you need to decide on the changes to make. It’s time to bring those thoughts of improvement to light, make them a priority, and turn them into reality. It’s time to do what you can. It’s time to take a few simple steps to achieve extraordinary results!

    anything else relevant to allowing them into your trusted employment environment. It includes checking for prior criminal or other wrongdoing activity in a meaningful way (consistent with the law), and even financial background (again, consistent with the law). Every detail – because once you let them in and add them to the payroll, they are implicitly part of your internal controls.

  1. Experienced employees. You might also want to double check the backgrounds – especially criminal backgrounds – of existing employees who are about to be moved into sensitive or otherwise high risk positions. Examples include moving your general ledger accountant into the wire transfer group. As allowed by law, custom and work rules, it’s always a good idea to re-screen employees who move up or over to higher-risk positions. Why do we do this? Simple, because people change. Often for the better. Sometimes not. We’ve all seen the stories of the 20-year employee or politician who ‘suddenly’ changes and commits wrongdoing.
  1. Third-party relationships, especially new vendors, suppliers and contractors. These folks all have one thing in common. We allow them into our control environment to provide goods or services, but they have half of the records! Check out new vendors, new contractors and new suppliers. Run their businesses and leaders through Internet and news databases See what they are known for: outstanding service and charity work, or overcharges on a government project.
  1. Long-term vendors, suppliers and contractors. You may have relied upon a sole vendor for many years. Well, screen them again. Screen every 3 years as if you didn’t know them before. Double-check their integrity. Make darn sure you’re looking at long-term contractor and supplier relationships in the same way as they if you hadn’t met these people before today. Just like with employees, we do this because businesses change with pressures. Again, often for the better. But sometimes not. Here’s a good idea that relates to all third party suppliers and contractors. Each year, have them certify compliance with your Code of Conduct. Make it part of your core deal with them.
  1. Significant Commitments – like new loans, leases, partnerships and other major commitments. Let’s screen who the partner is, who the other entity is, who the bankers are that we’re borrowing money from, and who the new investor is. What are the issues around their reputation that should be considered before we make significant commitments and expose our reputation?
  1. Transactions. Last, and perhaps most important – screen transactions. Especially transactions resulting in someone getting paid. If you are reviewing a travel expense reimbursement, what questions should you be asking yourself before you approve that document? How about invoices, wire transfers, time sheets, loans, and any other documents that cause funds to be disbursed. What information should we be running through our ‘approval screens’? Start with this simple acronym: HDIK? How do I know this piece of paper in front of me right now is correct? Should I put my good name on it, and why? Such basic questions. Such powerful results.

These are just a few examples of everyday business scenarios where the concept of screening comes into play. Be creative when screening people, supplier and transaction approval decisions. Always be thinking, what do I need to know to make a better hiring, contracting, payment or relationship decision. Find and analyze that information. That’s what effective screening is all about.

 

John J. Hall, CPA

John J. Hall, CPA

John J. Hall, CPA, is an author, speaker and results expert who presents around the world at conventions, corporate meetings and association events. Throughout his 35-year career as a business consultant, corporate executive and professional speaker, John has helped organizations and individuals achieve measurable results. He inspires audience members in corporations, not-for-profit organizations and professional associations to step up, take action and “do what you can.”

 

 

Fraud Prevention Tip

Fraud Prevention Tip #18: Daily Preventive Behaviors

Fraud has many names: embezzlement and theft, financial manipulation, kickbacks and other shadow deals, misconduct, and outright wrongdoing. But in 90% of the cases I’ve touched over 37 years, there was one thing in common: formal control procedures without the related human competence and daily attention to detail created false security about fraud prevention.

Anti-fraud daily behaviors by informed managers and staff are the critical missing link in most efforts to battle wrongdoing. And few organizations are doing anything about it.

Effective anti-fraud behaviors include three specific actions:

1. Pausing at the moment of transaction approval to think, “How do I know that what I’m reviewing right now is correct?” This is The Anti-Fraud Moment. “How do I know” – or HDIK? – becomes the mantra of those who take pride in their approval signature.
2. Choosing to ‘doubt’ when something doesn’t look or feel right. Doubters double check details as a quality step: not just as an anti-fraud step. (And Doubters make great supervisors!)
3. Resolving or referring suspicions. Refuse to sign any document that looks funny to you until you know it’s correct. Resolve what you can; quickly refer any suspicions you can’t resolve to the experts who specialize in Fraud Prevention and Detection.

If all managers and staff would just take these three simple steps every day, most fraud risks go away.

But here’s where this process breaks down. Employees care. They want to do the right thing. But they simply do not know how.

Here’s an example:

Frustration oozed from Jim’s expression. He had just completed the required Policy on Anti-Fraud Responsibilities annual certification acknowledging that he was responsible for preventing fraud in his department. “I’m willing!” he said to himself. “But no one has ever taught me what fraud looks like in what I see.”

The fix, of course, is meaningful Anti-Fraud Skills Training. Not just awareness sessions. Real skills training that includes examples of exactly what wrongdoing and fraud look like in documents managers and staff see each day.

The best and most cost-effective training comes directly from supervisors who coach their team in what can go wrong and exactly what it looks like. This coaching includes setting the right tone about what’s expected, and encourages every employee to speak up immediately when anything doesn’t look right.

To help you in your anti-fraud efforts, here’s a quick summary checklist you can share with others. Tell them, “We deter fraud when we:

1. Pay attention and question details
2. Know before approving
3. Hold others accountable for results
4. Enforce the rules
5. Enforce documentation standards
6. Ask, count, inspect, double-check
7. Balance, reconcile and review
8. Are passionate about quality
These same steps can be applied to any risk – not just fraud.

Knowing what to look for, paying attention each day, and speaking up are the fundamentals of any quality or process improvement effort. And that makes fraud prevention behaviors part of the normal workflow; not extra work.

John J. Hall, CPA

John J. Hall, CPA

John J. Hall, CPA, is an author, speaker and results expert who presents around the world at conventions, corporate meetings and association events. Throughout his 35-year career as a business consultant, corporate executive and professional speaker, John has helped organizations and individuals achieve measurable results. He inspires audience members in corporations, not-for-profit organizations and professional associations to step up, take action and “do what you can.”