It is widely believed that fraud is a multi-million dollar problem for businesses in Canada.

Search through the local stories in any major newspaper over a given week, and you will likely find several references to frauds involving thousands, tens of thousands and even hundreds of thousands of dollars.

Identify Sources of Fraud

Fraud is a human problem which becomes a business problem. The first step in prevention is to recognize some of the methods used by employees to victimize companies:

• Submitting false claims for meals, accommodations and vehicle expenses.
  
• Stealing inventory from the office, the warehouse, or the retail area.
• Consuming or using company assets for personal use. Examples include
• unauthorized use of company vehicles, long distance telephone calls, fuel and other such items.
• Establishing phantom clients with bogus identification, credit limits, and addresses. The phantom client orders material, establishes a good credit rating by making regular payments then, after increasing the order in dollar amounts (thereby decreasing your inventory while building up the receivable), disappears.
• Creating suppliers that provide products/services that do not exist. Invoices are received, processed through accounts payable, and paid on a regular basis. This method is most effective when repetitive soft products or services are being offered in such areas as publication, advertising, or communications, as many businesses pay for these services automatically.
  Substituting cash from the register, or cashing cheques "To Cash", and then charging the amount to an expense account or the drawings account of the owner/manager.
• Altering amounts on cheques by inserting numbers or words, "$70.00 becomes $170.00" and "$...Seventy" becomes "$One Hundred Seventy".
• Making purchases from legitimate suppliers but sending them to other locations rather than the normal place of business.
• Intentionally over ordering supplies for a specific job location. The overrun is simply siphoned off by the dishonest employee.
• Receiving commissions or kickbacks from suppliers. As the supplier must recover this "commission", the selling price of the service or product to your company will be higher.
• Providing preferential credit terms or unwarranted discounts for merchandise or services to customers, friends or relatives.
• Manipulating payroll records. Consider payment to non-existent employees,
•  increasing remuneration or padding hours to obtain more regular pay or overtime.
• Selling capital assets that are in remote locations or are seldom used.
  Eliminating accounts receivable by writing off balances as "bad debts" and then pocketing the proceeds when payment is made.
• Over ordering, returning part of the order, and requesting cash for the returned goods.
• Charging personal items to company credit cards.
• Modifying commission percentages, or the dollar levels that commissions are based on.
• Receiving cash and either not placing it in the cash register, or recording an amount less than received and pocketing the difference.
• Since the essence of fraud is deception, determining its prevalence is problematic. Many frauds go undetected -- probably more than 75% -- and many which are detected are not reported.

Review Your Company's Controls

The owner/manager who's busy concentrating on business growth may overlook potentially weak areas of the company's operations. To combat misappropriation of company assets, owner/managers must take the time to examine the internal checks that may, or may not be, in place within their businesses.

Should you wish, Logan Katz LLP can review your company's systems and controls for possible weaknesses. Then, we will develop a strategy and implement policies to guard against the threat of fraud. And remember, despite the best prevention strategies, a crisis may sometimes strike. Make sure you also know how to deal with known or suspected frauds.

The above provides general information only. It should not be regarded or relied upon as accounting or taxation advice or opinions. Logan Katz LLP Chartered Accountants would be pleased to provide more information or specific advice on matters of interest to you.  
 

All contents are Copyright © 2003, Logan Katz LLP Consulting Inc. All Rights Reserved.