Avoiding Fraud Through Payment Schemes

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Small businesses, including law firms, are at risk of employee fraud. The law firm is also the first to receive a call when a business owner suspects fraud. Therefore, law firms and their business clients need to understand the steps that can be taken to prevent or discover fraud within their businesses.

Payment Controls One area of specific fraud exposure is through payments made by the company. Minimizing fraud perpetrated through payment schemes is called payment controls. At the beginning of a conversation about payment controls it is easy to want to jump to catch phrases like segregation of duties and internal audits. They are certainly some of the most common and highly effective controls businesses can put in place to ensure the integrity of their payment cycles. However, payment process controls are not a one-size-fits-all application.

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Conventional controls such as segregation of duties, internal audits and anonymous hotlines can be difficult and expensive to implement in small businesses. This is likely why statistics show small businesses frequently incur the highest median occupational fraud losses and why the biggest contributor to such losses is thought to be a lack of sufficient internal controls.

Consider the challenge of implementing internal controls in a small business. Billing schemes and check tampering schemes, both of which take advantage of the payment process, are the most commonly reported types of occupational fraud to occur in small businesses. Losses related to these schemes commonly come in at over six figures because most occupational frauds go on for two years before they are discovered. With these statistics in mind, this article will focus on how to implement payment process controls aimed at preventing fraudulent billing and check tampering schemes against small businesses.

Review Bank Statements Billing schemes in general are the misappropriation of company resources through manipulation during the bill payment process. These schemes can be difficult to prevent in small companies where there are not enough people in the office to have full segregation of duties. No matter the size of a company, the business owner needs to have bank statements sent to their home or subscribe to online bank statements. Doing so provides the owner with an opportunity to review payments made each month, along with the related canceled checks.

The key aspect of this control, however, isn’t the review itself; it is the act of informing the bookkeeping personnel that the bank statements are being reviewed by the owner. The best way to enforce this understanding is to follow up with staff personnel on a couple of randomly selected payments each month; even if there is no suspicion of chicanery. This preventative control will reduce the perception that there is an opportunity for an individual to write a check to himself, to a false vendor or to purchase a product or service with no business purpose.

Talk to Vendors Another fraud prevention strategy is for the owner of the business to make sure the accounting staff knows the owner is touching base with vendors on a monthly basis. Doing so, even if it is to just say hi, gives the vendor an opportunity to let the owner know about any unusual situations such as an unpaid invoice or late payment. This will also uncover a fraudulent vendor, which is a scheme that is often used. When the accounting staff knows this process happens on a regular basis, it will act as a preventative control against billing and check tampering fraud.

The focus should be to prevent fraud schemes from starting and to maximize the potential for early discovery if such a scheme is started. The procedures discussed above address both of these issues. The key to prevention is that employees know the owner is involved in the business’s finances and is checking the transactions that flow through the bank statements.

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