We recently received a notable call on ICW Group’s confidential Tip Line (855-ICW-FRAUD). A business owner reported that one of their most trusted employees had orchestrated a fraudulent scheme, which included taking out several bogus workers’ compensation insurance policies for the business and embezzling over $4M. The business contacted us to report the fraud because they lacked the funds to cover the unpaid premiums and had never authorized the policies in the first place. These fraudulent policies were just one element of a broader scheme perpetrated by this former employee.

Unfortunately, employee fraud impacts American businesses at an alarming rate, regardless of whether the organization is public or private. According to Occupational Fraud 2024: A Report to the Nations by the Association of Certified Fraud Examiners, organizations lose approximately 5% of their revenue to fraud each year.

Protecting a business from internal fraud, particularly by bookkeepers or financial staff, requires implementing robust internal controls, ensuring proper oversight, and fostering a culture of accountability. Here are several key steps businesses can take to safeguard themselves:

  1. Segregate Duties
  • Separate key financial responsibilities to ensure no single employee has complete control over financial processes. For example:
    • One person handles payments (e.g., writing checks).
    • Another person reconciles bank statements.
    • A third person reviews financial reports.
  1. Conduct Regular Audits
  • Internal Audits: Schedule periodic internal reviews of financial records conducted by a different staff member or team.
  • External Audits: Engage an independent auditor to review financial statements and processes annually.
  1. Implement Strong Access Controls 
  • Restrict access to financial systems and data based on roles and responsibilities.
  • Use multi-factor authentication for financial platforms.
  1. Monitor Bank and Credit Card Activity
  • Require monthly reconciliation of bank and credit card statements by someone other than the bookkeeper.
  • Review transactions regularly for unusual or unauthorized activities.
  1. Require Dual Authorization
  • Implement dual approval for significant transactions, such as issuing checks or authorizing wire transfers.
  • Use approval workflows in accounting software to document authorization.
  1. Conduct Background Checks
  • Perform thorough background checks, including credit history and references, before hiring bookkeepers or financial staff.
  1. Enforce Mandatory Vacations and Job Rotation
  • Require bookkeepers to take time off, allowing others to handle their duties temporarily. This helps uncover discrepancies or unusual patterns.
  • Rotate financial responsibilities among employees periodically.
  1. Leverage Technology
  • Use accounting software with robust fraud prevention features, such as QuickBooks or NetSuite, which offer:
    • Audit trails for tracking changes.
    • User permission controls.
    • Real-time alerts for unusual transactions.
  1. Develop a Whistleblower Policy
  • Establish an anonymous reporting system for employees to report suspicious activities without fear of retaliation.
  1. Provide Training on Fraud Awareness
  • Train employees on recognizing fraud indicators and the importance of internal controls.
  • Educate management on the risks and methods of fraud detection.
  1. Review Vendor and Payroll Activity
  • Verify that vendors and employees listed in payroll or accounts payable systems are legitimate.
  • Watch for fictitious vendors or ghost employees.
  1. Maintain Insurance Coverage
  • Obtain fidelity bond insurance or employee dishonesty insurance to cover potential losses from fraud.
  1. Foster a Culture of Transparency and Accountability
  • Create an environment where ethical behavior is expected and reinforced.
  • Clearly communicate that fraud prevention is a priority and that violations will have serious consequences.

By implementing these steps, businesses can significantly reduce their exposure to internal fraud by bookkeepers or other financial staff.  You’re encouraged to visit ICW Group’s website to learn more about how ICW Group can partner with you to combat fraud.