While the individual elements of the “Fraud Triangle” and the risk of diversion of funds exist, to varying degrees, in every company, a well-designed system of internal controls can help to reduce or mitigate the risk of fraud by minimizing the opportunity element.
Internal controls related to fraud risk can be classified as Preventive Controls (designed to prevent fraudulent acts from occurring) and Detective Controls (designed to enable the timely detection of fraudulent acts). Basic examples of preventive controls and detective controls related to key activity areas are listed in the table below.
Many companies further reduce their exposure to fraud by purchasing insurance coverage. Such Employee Dishonesty/Fidelity Bond coverage is often required by lenders or other third parties, but it is important to note that most insurance carriers will evaluate the existing internal controls of the proposed insured during their underwriting process, and will likely factor the results of their evaluation in the policy’s pricing.
Another approach is to conduct a periodic “Fraud Checkup.” At its simplest, the fraud checkup involves interrogation of a company’s detailed transaction records by a specialist skilled in using computer-assisted analytical and statistical tools to help identify any indications of fraudulent activity. Such procedures could include tests of the validity of vendor tax identification numbers or payroll Social Security numbers, tests to identify unusual patterns of transactions, comparisons of vendor and employee mailing addresses, and dozens of other analytical and statistical tests that have been proven to be useful in detecting fraud.
Depending on the results of these procedures, additional detailed analysis of specific transactions may be performed to provide additional assurance as to the integrity of the company’s operations.
Employee fraud is a significant and pervasive business risk, and building owners and managers are not immune. These risks can be reduced or mitigated by taking actions designed to prevent employee fraud or to more timely detect and reduce the impact of ongoing employee fraud.
Mark Rambin is a partner with TravisWolff & Company, LLP. He oversees the firm’s litigation and forensic accounting practice. He is a licensed CPA certified in financial forensics.
OVERSIGHT:
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|
Activity Area |
Preventive Controls |
Detective Controls |
|
Tenant Rental Income |
Tenant rents are sent directly to a bank lockbox |
Timely analysis and follow-up of rent-rolls and tenant accounts receivable |
|
Cash Disbursements |
Use of “positive pay” check protection; require additional approvals for payments to parties not on vendor list |
Timely bank reconciliations; identification/analysis of recurring payments to payees not on vendor list |
|
Payroll |
Investigate the validity of address information and Social Security numbers of new or changed employee information |
Timely bank reconciliations; investigation of budget variances for regular and overtime pay |
|
Capital Improvements |
Use of a formal bid process for all projects over a specified dollar amount |
Physical inspection of improvements as compared to construction draw requests |
|
Building Operating Expenses |
Use of a formal bid process for major expenses; screen and investigate all vendors prior to adding to vendor list |
Preparation of zero-based operating budgets; timely comparison of actual vs. budgeted expense |
Facility Managers and Property Managers Are Not Immune To Employee Fraud
Three Risk Factors That Increase Employee Fraud
How Facility and Property Managers Can Reduce Employee Fraud
