A fraud sweep at the end of the year can pinpoint weaknesses in internal controls and uncover ongoing losses that may be going unnoticed. This article lists some of the signs, such as doctored, forged or missing documents, that fraud may be occurring. It also explains that forensic accountants are trained to recognize these signs and to help management find any fraud perpetrators and ensure ongoing internal controls remain effective.

What Are The Signs?

There are hundreds of ways to commit fraud, and the signs aren’t always obvious, especially to company insiders who are accustomed to how the business operates and may not be aware of best practices for internal controls. A thorough, objective review performed by an outside forensic specialist can unveil suspicious losses that may indicate fraud. It also can identify internal control weaknesses that may leave a business vulnerable to fraud perpetrators. 

Among the documents a fraud expert will examine are bookkeeping records, invoices, bank statements, payments, journal entries and financial reports. Management can assist by ensuring easy access to records and personnel — and by paying attention to how long it takes employees to produce documents. If some records are missing, management needs to ask why and what steps employees took to find them. Documents that can’t be located are a red flag for fraud.

What Doesn’t Feel Right?

Forensic accountants are trained to recognize the signs of doctored, forged or missing documents, or anything that doesn’t “feel right.” For example, an unusual number of journal entries posted near the end of the fiscal year could be adjustments made to cover theft or misappropriation.

Adjustments to receivables and payables are possible signs that employees are misappropriating customer payments or engaging in billing schemes. Another red flag is out-of-balance books. An end-of-year physical count of merchandise or a reconciliation of cash can bring missing assets to light.

Forensic accountants pay particular attention to payroll documents. Missing or otherwise unaccounted-for employees could indicate the presence of “ghost” employees. Management can help to expose such schemes — in which perpetrators pay nonexistent staff members — by personally handing out year-end paychecks or bonuses (or paper stubs if employees have their checks direct deposited). Any leftover checks merit further investigation.

Management should also observe employee behavior. Fraud perpetrators often avoid taking vacation or sick time for fear someone will uncover their activities in their absence. And thieves may seem irritable or defensive when asked to comply with an organized fraud sweep.

How Do You Deal With It?

If something appears suspicious, businesses must be willing to confront it — and resist the temptation to explain away exceptions. If an employee is caught, management shouldn’t assume that this employee is the only culprit. Unfortunately, fraud schemes often involve more than one person. And people outside the company or a combination of employees and outsiders may commit fraud.

But warning signs don’t always lead to a thief. Genuine errors or an ill-designed process may explain accounting irregularities. Better training, process improvements or fortified controls can help correct honest mistakes and prevent future problems.

If a company hasn’t already established a system for employees, vendors, customers and the public to report suspicious activities, it should do so. Confidential hotlines, while not required of private companies as they are of public ones, have cut fraud losses by a median of 50%, according to the Association of Certified Fraud Examiners.

Experience Matters

There’s no way to know for certain whether fraud has managed to creep into your operations. That’s why a fraud sweep by a qualified forensic accountant can provide the reassurance you need to end the year well. These experienced outsiders have the necessary objectivity and training to thoroughly investigate accounting records and review internal controls to ensure they’re effective at preventing and detecting dishonest behaviors.

© 2016