We know the fraud triangle is made up of opportunity, pressure and rationalization. For many businesses, all three can occur. Dishonest employees learn the ins and outs of your organization and find ways to commit fraud without raising suspicion. Discussed below are the three biggest areas employee fraud can occur within your organization.
- Vendor Fraud: This can occur when an employee creates fake vendors to send payments to accounts that belong to themselves, family, or friends. A way to check against this happening within your organization should be to ask for the vendor’s mailing address instead of just a PO box or verify tax ID numbers. Some reports to also look at can be a vendors total listing. Compare this report between fiscal years and research any large fluctuations. Check for special payments outside of normal procedures, or payments just under approval limits.
- Ghost Employees: Like vendor fraud, an employee with user role access to enter employee information, and conduct payroll can create fake employees. Who pull a normal paycheck to an account that belongs to the employee or friends and family. A scan of employee numbers looking for anything outside of the typical range, missing personnel files, or even missing withholdings for taxes or social security can all be major red flags for ghost employees. To add extra barriers against ghost employees consider assigning different employees’ different entry and payroll tasks and having department heads/managers approve time for their specific areas since they will be more in touch with who they are working with.
- Timesheet Padding: As the use of technology for time recorded increases, time sheet padding has become more difficult but can still be done. This occurs when employees are running late and ask a friendly co-worker to clock them in. A pattern to look for within time sheet padding is nice round numbers in an employee timecard. The employee may be consistent or modifying their time. As mentioned before, timesheet padding has become increasingly difficult with the use of technology as an audit trail can be created within the payroll system to view when and how often time is modified.
One of the best ways to prevent fraud is to have a conversation with your team and let them know you are on the look out for fraud. A great check can be reviewing employee’s user role’s within accounting systems, and payroll/time keeping systems. These reviews can help to ensure any one employee does not have too much access over what their position requires giving them both opportunity, and rationalization within the fraud triangle.
If you have questions about how to have conversations with employees, or the reports that can be pulled from your accounting software including what to look for on these reports, feel free to contact a Henry + Horne audit professional.