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How companies can prevent, detect fraud from the inside

fraud, scam, government, accountingFor small and medium sized companies, fraud schemes to create fake invoices and payments to vendors is fairly simple, if the right processes are not in place. According to an article written by Cecilia Locati in the Journal of Accountancy, these seven tips can help companies decrease the presence of fraud through the procurement process.

  1. Segregation of duties – The lack of segregation of duties makes it easy for one individual to have complete control over a process, such as procurement. Implementing segregation of duties will disperse the responsibilities over more than one individual. For example, the individual processing payments should not be the same individual that is posting transactions to the general ledger.
  2. Reviews and approvals – It is important that the review process for invoice payments is thorough and complete in order for a reviewer to determine the legitimacy of the invoice and the vendor.
  3. Vendor selection – The vendor selection process should include a bidding procedure and a due-diligence process to determine that the vendor is genuine and that the company is getting a quote that is reasonable based on other vendors in the market. Additionally, after the vendor is selected it should go to a second party for final review and approval.
  4. Automated controls – Companies should implement automated controls to go along with manual processes which are more prone to errors and fraud. Automated controls include processes in areas such as payment and other systems that cannot be overwritten by a manual control.
  5. Consistent vendor monitoring – It is recommended that an individual other than the one maintaining a relationship with the vendor should be monitoring the vendor’s performance over time, in order to ensure expectations are being met and maintained in regards to service and performance. This will help to eliminate the likelihood that fraudulent or fake vendors will be used in business.
  6. Budget reviews – Reviewing the budget to actual numbers will help a company to detect any outliers from expectations, along with reviewing financial ratios to determine any numbers that are not consistent with expectations.
  7. Anonymous reporting of fraud availability – Companies should implement formal and structured processes for reporting suspected fraud. This can be done through the use of an anonymous hotline or other systems for employees to use at their convenience.

Kimberly Harvin