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Combat Industry-Related Fraud Risks With Internal Controls

Occupational fraud risk varies by business sector and some industries, such as construction, real estate, manufacturing, and transportation, are more vulnerable to employee theft, according to the Association of Certified Fraud Examiners (ACFE). Whereas other industries may have less fraud exposure but face specific threats. Here are some industry-related fraud risks and suggestions for internal controls to help prevent theft.

Construction

Some types of fraud are more prevalent in the construction industry, particularly payroll and billing fraud. Segregation of accounting duties — having them performed by more than one employee — is critical to reducing both types.

To prevent payroll fraud, have someone independent of your accounting department verify the names and pay rates on your payroll. If you don’t already, consider paying employees using direct deposit, rather than with checks or cash. And consider making surprise jobsite visits to compare employee headcounts to time reports and wage payments.

Kickbacks and bid-rigging can be kept to a minimum with extra scrutiny. If your company is suddenly winning bids that it hasn’t in the past and certain bids seem like a stretch, verify that employees have followed your bidding processes.

Restaurants

Successfully combatting restaurant theft generally takes a multipronged approach. If you haven’t already, integrate your accounting, inventory, and sales systems. And to manage potential occupational fraud, conduct background checks on new hires, install video surveillance throughout your restaurant, and know how to spot red flags. For example, keep your eye on servers who are always flush with cash or purchasing managers with unusually cozy relationships with vendors.

Vendor fraud is particularly common in the food-services industry. It can be hard for managers to keep track of the daily stream of deliveries, which shady vendors might exploit by inflating their bills to reflect more or pricier items than they delivered. If vendors collude with restaurant employees, theft can exact a heavy financial toll. Keep an eye on receiving and accounting employees and investigate any relationships that seem suspicious.

Auto Dealerships

If you own or manage an auto dealership, good internal controls generally require your accounting department to post transactions daily. Post new and used vehicle sales, repair orders, invoice payments, payroll, and cash receipts.

By 1:00 p.m. on any given day, you should have access to real-time checkbook balances and other accounting information effective as of 5:00 p.m. the day before. Timeliness makes it easier for you to spot the first signs of fraud and use the data to catch a perpetrator before they get away with theft.

Medical Practices

According to the ACFE, embezzlement — such as stealing cash on hand, forging checks, and lying on expense reimbursement requests — is the most common form of occupational fraud in medical practices. As all businesses should, be sure to segregate duties. Avoid having one employee in charge of both approving vendors and purchasing or preparing financial records and reconciling them. If your practice is small, you might want to outsource some accounting activities to help prevent possible fraud.

Conduct background checks when hiring and keep an eye on any workers who seem to be living beyond their means. Employees should know that unannounced audits are possible, but don’t tell them what audits will cover. Also, never let a nonphysician or nonowner employee sign checks.

Customized Solutions

In addition to requiring the segregation of accounting duties, certain controls can help any business reduce fraud risks. For instance, put a fraud policy in place that spells out prohibited activities and the consequences of committing them, including termination and criminal prosecution. And offer an anonymous hotline that employees, customers, and vendors can call to report potential fraud.

For controls that address the greatest fraud risks to your organization or industry, contact us. We can conduct a fraud audit to identify potential points of weakness and help you implement stronger protections.

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