Desperation, greed and disgruntlement are some of the reasons that employees steal from their employers, and that theft usually amounts to more than just stealing a cookie from the cookie jar.
Consider these possible scenarios:
• A warehouse manager approves $535,000 in checks to be issued to dormant vendors, depositing the checks into a bank account he controlled.
• An employee takes his $632.86 check to cash at a check-cashing facility. As he is walking in, a stranger approaches and offers $1,000 cash for the payroll check. The stranger, a member of a crime ring, then reproduces many identical, but counterfeit, checks and issues them for more than $20,000.
• A former employee takes the routing and account number from her last payroll check, and pays her phone bill, mortgage payment and inappropriate magazine subscription dues online and via telephone.
Widespread issue
Many companies in the Midwest feel sheltered from crimes that are often attributed to other parts of the country. The Association of Certified Fraud Examiners, however, estimates that on average, every business in America loses 5 percent of its annual income to employees illegally lining their pockets. In fact, the median loss suffered by businesses with fewer than 100 employees was $190,000 per scheme.
The first question most employers ask is who would engage in such activity.
Surprisingly, most are trusted and valued employees who have been with the company for many years. Employers should be aware that:
• nearly one-third of all fraud is committed by people in accounting departments;
• fewer than 8 percent of those convicted for fraud had previous convictions; and
• the higher an employee's education, the higher the amount of theft; median losses are $100,000 for high-school graduates and $425,000 if the employee has a postgraduate degree.
Fraud can be achieved in numerous ways, which makes it challenging for employers to protect themselves and their assets. Also concerning is the length of time it can take - usually 18 months - before fraud is detected. The good news is that there are many actions employers can take to protect themselves.
Safeguarding company assets
The obvious, and most often discussed, is internal control. Segregation of duties such as cash counting, accounts payable and accounts receivable procedures is the first line of defense.
It's also important to help employees understand business ethics. Implement written fraud procedures and policies. Train employees about what constitutes fraud and how to detect it. Most employees do not want to be whistleblowers; establish an anonymous fraud hotline for them to use. Similar tools may already be in place for employees to report other unethical acts such as sexual harassment, so simply expand the scope.
Companies that don't have an information technology department should contract for such services with a third party who will ensure that technology and data are secure.
Bring in an independent auditor to conduct a thorough assessment. Fraud risk assessments identify areas within organizations that are most vulnerable.
Here are five bank-related steps that can help companies combat fraud.
1. Implement mandatory direct-deposit for payroll to minimize account number exposure. Pay-card programs can be used for those employees who do not qualify for bank checking accounts.
2. Companies with accounts receivable should use a bank lockbox service. A lockbox service provides a designated post office box that's accessed only by bank associates. This reduces the risk of misappropriating payments to personal accounts.
3. Implement positive pay. If a clearing check doesn't match up with the issue file, the bank will notify the employer of the exception and let the company determine whether to pay the check or return to sender.
4. Implement automated clearing house block/filter or ACH positive pay. If a checking account number is compromised, an employer may have as little as one business day to catch fraudulent transactions. Utilizing ACH block/filter services helps determine which electronic items are legitimate in a timely manner.
5. Explore online banking options. Electronic ACH payments, wire transactions, account transfers and operating account access are a few items that can be more securely monitored through customized user access and approval processes.
Many resources exist to protect company assets. Employers should fully utilize their options by discussing these suggested processes with trusted advisers.
Darla Marler is assistant vice president and treasury management officer for UMB Bank in Springfield. She may be reached at darla.marler@umb.com.
