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Five Tips to Help Construction Companies Avoid Cash-Related Fraud

January 23, 2015

Cash is one of the most important assets on a corporate balance sheet. Accordingly, companies should implement a system of controls that protects cash from a multitude of threats. Cash-related fraud is not industry specific and there are numerous frauds that occur with regularity across organizations of all types, from Fortune 500 companies to small non-profits. Some examples are as follows:

  • Skimming occurs when cash is stolen before the company records it. Retail organizations are often victimized by this type of fraud. An employee “pockets” the payment and then fails to record (or under-records) the sale.
     
  • Billing fraud occurs when an employee submits invoices for fictitious goods, services, or other personal purchases or simply inflates the quantities of purchased goods. The funds for the repayment of these invoices are directed to the employee, or to a party working in conjunction with the employee to commit the fraud.
     
  • Check tampering occurs when an employee steals cash by forging or altering a check drawn on the company’s bank account.
     
  • Expense reimbursement is also an area where an employee can misappropriate cash. The fraud occurs when an employee makes a claim for fictitious or inflated business expenses.

Since the payroll function is cash based, it is particularly vulnerable to fraud. The fraud may simply revolve around an employee inflating compensation. Under an alternative scheme, an employee could create a fictitious “ghost” employee and either divert funds to the fake person’s bank account or direct those funds into the employee’s own personal account. Relatives and friends are often candidates in this scheme. Withholding can also be manipulated: an employee processing payroll fails to withhold items such as 401(k) or health insurance deferrals, but funds those items from company cash when initiating transfers to benefit administrators.

Fortunately, there are a number of simple, cost-effective controls that can be put in place to prevent fraud from occurring. Here are a few suggestions:

  1. The CEO or owner of any company should open bank statements and review cancelled checks. A monthly review could reveal improper payments made without authorization. 
     
  2. There should be a segregation of duties so that the individual who prepares bank reconciliations should not have the ability to record cash receipts or disbursements. Ideally, the person preparing bank reconciliations should not have access to the general ledger or check-signing authority. 
     
  3. Eliminate manual checkbooks and institute the use of blank check stock in conjunction with the use of Magnetic Ink Character Recognition (MICR) toner cartridges. Blank check stock and signature stamps should be kept under lock and key. Extra MICR toner cartridges should not be kept on hand, and a contract with an MICR toner supplier should be established to institute a toner replacement schedule. A signature stamp should only be used if absolutely necessary and should be avoided in most cases.
     
  4. Dual signatures should be required on checks for significant amounts. 
     
  5. If the company uses online bill pay and/or wire transfers, the owner of the company or, in the case of large companies, a board-designated executive, should be the only individual authorized to complete those transactions. 

The above-referenced controls can be implemented with minimal financial costs but do require some time investment. While streamlining processes to improve organizational efficiency is important, it is equally critical to ensure that those processes safeguard a company’s cash position.

For more information or additional questions, please contact Tom Dearnley, tdearnley@blumshapiro.com

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