fraud have been discovered after a long-term employee, who never took vacations,
missed work because of an illness or other unavoidable reasons.
To illustrate, consider the case where a bank officer who was not required to take
vacations stole approximately $5 million over 16 years by printing fake certificates of
deposit. The officer would then issue the fake certificate to the customer and pocket
the customer’s money. After discovering the theft, the bank began requiring all em-
ployees to take vacations.Separating Responsibilities for Related Operations. To decrease the possibility of
inefficiency, errors, and fraud, the responsibility for related operations should be
divided among two or more persons. For example, the responsibilities for purchasing,
receiving, and paying for computer supplies should be divided among three persons
or departments. If the same person orders supplies, verifies the receipt of the supplies,
and pays the supplier, the following abuses are possible:- Orders may be placed on the basis of friendship with a supplier, rather than on
price, quality, and other objective factors. - The quantity and quality of supplies received may not be verified, thus causing
payment for supplies not received or poor-quality supplies. - Supplies may be stolen by the employee.
- The validity and accuracy of invoices may be verified carelessly, thus causing the
payment of false or inaccurate invoices.
The “checks and balances” provided by dividing responsibilities among various
departments requires no duplication of effort. The business documents prepared by
one department are designed to coordinate with and support those prepared by other
departments.
To illustrate, consider the case where an accounts payable clerk created false invoices
and submitted them for payment. The clerk obtained the resulting checks, opened a
bank account, and cashed the checks under an assumed name. The clerk was able to
steal thousands of dollars because no one was required to approve the payments other
than the accounts payable clerk.Separating Operations, Custody of Assets, and Accounting. Control policies should
establish the responsibilities for various business activities. To reduce the possibility of
errors and fraud, the responsibilities for operations, custody of assets, and accounting
should be separated. The accounting records then serve as an independent check on
the individuals who have custody of the assets and who engage in the business oper-
ations. For example, the employees entrusted with handling cash receipts from credit
customers should not record cash receipts in the accounting records. To do so would312 Chapter 7 Sarbanes-Oxley, Internal Control, and Cash
Tips on Preventing Employee Fraud in Small Companies
- Do not have the same employee write company checks and
keep the books. Look for payments to vendors you don’t know
or payments to vendors whose names appear to be misspelled. - If your business has a computer system, restrict access to ac-
counting files as much as possible. Also, keep a backup copy
of your accounting files and store it at an off-site location. - Be wary of anybody working in finance that declines to take
vacations. They may be afraid that a replacement will un-
cover fraud. - Require and monitor supporting documentation (such as
vendor invoices) before signing checks.- Track the number of credit card bills you sign monthly.
- Limit and monitor access to important documents and sup-
plies, such as blank checks and signature stamps. - Check W-2 forms against your payroll annually to make sure
you’re not carrying any fictitious employees. - Rely on yourself, not on your accountant, to spot fraud.
Source: Steve Kaufman, “Embezzlement Common at Small
Companies,” Knight-Ridder Newspapers, reported in Athens Daily
News/Athens Banner-Herald, March 10, 1996, page 4D.INTEGRITY, OBJECTIVITY, AND ETHICS IN BUSINESS