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Internal Controls: Critical to Safeguarding Assets From Employee Fraud/Theft

Employee fraud/theft frequency and severity continues to rise for all sizes of business each year.  Companies that have less than 100 employees are especially vulnerable, as that employer size has the highest percentage of frequency of fraud/thefts and the highest median amount stolen.  The single biggest denominator in almost all cases is the lack of internal controls that the company had in place.  As I will explain below, implementing the right internal controls can be the difference between experiencing a large theft and protecting those company assets.

While there are many insurance options for this kind of loss, the preferable option is to never have to get to that point.  Because so many companies that work in construction and the trades are small businesses, it can be easy to trust one person to wear many hats for that company.  Most small business have this person.  The employee that has the authority to deposit checks, run the payroll, and issue payments to vendors.  Many times this person has this much authority because he/she is trusted and a matter of convenience.

The most important internal control that you can put in place is making sure that there is a clear segregation of duties and responsibilities around the company’s financial management.  Access to financial instruments and information, including your accounting software, should be restricted and controlled carefully.  Do not allow any of these responsibilities be a one-person task.  There needs to be the right checks and balances in place no matter what size of company.

All requests for cash or check disbursements must include a copy of the original invoice and receipt.  Specify the individual by title, not by name who is authorized to approve these invoices/checks.  Consider having check signing thresholds that require two people to sign checks in excess of certain amounts.  Create an approved vendor list, which prevents employees from setting up fake vendors.  Have someone different from the person that issues the checks mail the checks.

Because payroll is usually a company’s biggest expense, extra attention is needed.  Management should know what the expected payroll amounts are in total.  Question anything above that immediately.  Have documentation of any changes to the expected payroll.  Even if payroll is outsourced, you should still pay close attention to new employees or “phantom” employees.

There are many “red flags” for fraud/theft.  They include but are not limited to: management’s lack of commitment to controls, close association with key employees (customers and vendors), lack of physical controls inside a company, and a lack of information system access controls.  Also, pay close attention if an employee’s behavior changes significantly, if an employee has high personal debt or other financial pressures, an employee that appears to be living a lifestyle that does not fit their current income level, and employee job dissatisfaction.

There is so much else that can be done to put more detailed internal controls in place.  If you have any questions about how or what internal controls to implement, Insurance Associates can assist you with this along with all of your insurance and bond needs.  Don’t become a victim to employee fraud/theft.  No matter how big or small your company is, the right internal controls can prevent employee fraud/theft.

Information about the Author:  Before coming to Insurance Associates, BJ spent twelve years working for several property and casualty insurance companies with four years in management.   He completed his studies through The Institutes and earned the prestigious Chartered Property & Casualty Underwriter (CPCU) designation in 2012. Recently BJ graduated at the gold level from ABC of Metro Washington’s Leadership Development Program. At Insurance Associates, BJ is first and foremost an advocate for our clients. Whether it’s helping a client to lower their experience mod or using his expertise to get a claim paid for a client, he is always available to help a client with any of their claims needs. In his free time BJ is most likely to be found on the golf course.

William (BJ) Westner Jr., CPCU, CRIS
Senior Claims Consultant
Insurance Associates

Sources:
http://longforsuccess.com/wp-content/uploads/2010/09/Good-Internal-Controls.pdf
https://www.fbi.gov/stats-services/publications/financial-crimes-report-2009
https://www.americanbar.org/publications/law_practice_home/law_practice_archive/lpm_magazine_articles_v35_is4_pg34.html

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