By Tyler Mosley, CPA, CFE
Audit Supervisor at Atchley & Associates, LLP
In the Association of Certified Fraud Examiners (ACFE) 2014 edition of “Report to the Nations on Occupation Fraud and Abuse,”1 85% of fraud cases involve misappropriation of assets. In addition, 29% of all fraud cases occurred in companies with fewer than 100 employees and for those fraud cases the median loss was $154,000.
In our March 2014 blog, Robert Marchbanks, CPA/CGMA, discussed preventing fraud in nonprofit organizations and provided a good checklist of steps an organization can take to prevent and detect fraud. I am going to expand upon one of these items as it is the item I come across the most frequently when performing financial statement audits of nonprofit and for-profit organizations. Many smaller organizations do not have enough room in their budget to hire multiple staff members to perform accounting and financial reporting duties. Specifically we see that some smaller companies do not have adequate segregation of duties related to the check disbursement process. We stress with our clients that having proper segregation of duties is important to mitigate the risk of an employee committing fraud and detecting fraud that timely.
For the most effective segregation of duties, employees involved in purchasing functions (initiating requisitions and approving purchases) should not have disbursement related responsibilities. These employees should not be able to approve invoices for payment, record invoices, receive goods, or have access to the vendor master files. We frequently see in small organizations that the same staff member creates check runs, approves invoices, signs checks, and performs bank reconciliations. In the event that segregation of these functions is infeasible, we suggest that a member of management who is not responsible for any of the aforementioned duties be the sole signor on all checks. They should also periodically review all check disbursement activity to ensure that only authorized transactions have been processed.
A little extra time spent monitoring the check disbursement process could save the company significant amounts of money down the road.