Follow Five Guidelines to Prevent Fraud, Embezzlement

In September, HUD Inspector General David Montoya testified in front of the House Financial Services Committee. He highlighted the challenges of conducting investigations with HUD’s limited staffing capacity after sequestration as more fraudulent and abusive activity surfaces within government housing programs.

“Achieving HUD’s mission while exercising the appropriate level of oversight to prevent or mitigate fraud, waste, and abuse continues to be an ambitious challenge for its limited staff,” Montoya said. “The appropriate funds are not going to those who really need it, and it’s instead going to fraudulent activity. We’ll continue to oversee HUD and its activity in housing programs to better manage this,” he added.

A major mission of HUD’s Office of the Inspector General (OIG) is to prevent waste, fraud, and abuse of HUD funds. In a recent bulletin, the OIG highlighted the issue of embezzlement. Embezzlement is a form of white-collar crime in which a person misappropriates the assets entrusted to him or her. In this type of fraud, the assets are switched from their intended purpose to the personal use of the embezzler. According to the bulletin, next to tenant fraud, embezzlement and theft are the next leading types of cases investigated by the OIG.

When dealing with a sufficient amount of money there’s bound to be fraudulent activity. Based on OIG experience, embezzlements are often committed by persons who have been with the organization a long time. They’ve worked their way into positions of trust and are key persons on the board, in management, or in accounting. And for the most part, these are ordinary people who give in to the pressures or temptations of the job.

Regardless of the size of your organization, you can take steps to mitigate the potential for embezzlement. The following five guidelines can help you implement strong internal controls and safeguard your site’s assets from thieves. We’ve also included a list of various embezzlement schemes to watch out for and best practice tips to prevent the listed schemes, in a Model Tool link at the end of the article.

1. Review All Invoices and Work Orders

Gary Rosen, a certified fraud examiner and a practicing certified public accountant, recommends that owners or managers get into the habit of reviewing invoices and work orders, especially those that are outside of the normal course of operation.

One way embezzlers cover their tracks is by creating and submitting false invoices for work. To combat this, require that all check requests be accompanied by supporting documentation, such as detailed invoices from vendors. Also, check current invoices against previous invoices. Embezzlers may change the dates on old invoices and submit them. Check whether work was actually performed or goods actually delivered.

When reviewing invoices and work orders, look for similar disbursement amounts, the same vendor with different addresses, or invoice account numbers that aren’t in sequence. More important, ask questions. Don’t sign off on checks and invoices without questioning them. Owners or managers should carefully review checks, invoices, and financial statements, looking for discrepancies.

2. Separate Duties When Disbursing Funds

Your site may have one trusted person who handles all aspects of cash management. But giving all those responsibilities to one person may be an invitation to embezzlement. No single person should have sole authority for writing checks. Separating duties in the check writing process makes it harder for someone to embezzle site funds.

To prevent your trust from being misplaced, follow these rules for separating cash management duties:

• The person who prepares the checks should not also be the one who approves and prepares the invoices and purchase orders;
• The person who signs the checks should not also be the one who approves invoices, prepares purchase orders, checks, or payroll, or makes purchases; and
• The person who signs checks should not also be the one who makes bookkeeping entries for accounts payable or the general ledger.

Another step to limit temptation is to require more than one signature on a check. Although many banks may honor checks even if they lack the second signature, or a forger could simply sign both lines, requiring two signatures introduces another hurdle for an embezzler to overcome. Also, missing or forged signatures could possibly raise red flags sooner, increasing the chances of an embezzler’s getting caught before too much damage is caused.

3. Perform Annual Audit

Rosen recommends having an annual audit prepared by an independent auditing firm at the end the fiscal year. An auditor may identify falsified records that your system might have missed. An auditor has the expertise in matching and reconciling financial transactions, and may provide ways to improve your site’s fraud prevention and detection processes. In addition, the OIG recommends that you rotate your certified public accountant firm at least every three years, and ensure that audit findings are resolved.

If you suspect fraud, or theft has occurred, you may need to undergo a “forensic”—that is, a crime-solving—audit, whereby a CPA with specific experience in forensic auditing will examine the financial records to detect fraudulent activity. This type of auditor or fraud examiner will gather evidence that could be presented in court.

If there's substantial suspicion of theft, the forensic auditor’s confirmation will help you pinpoint the perpetrator. And the auditor can provide expert evidence of how the theft occurred, which could be used in a court action to recover missing funds.

4. Review Bank Statements Monthly

Owners and managers should look for discrepancies between what the manager shows on the general ledger report and the numbers on the bank’s monthly financial statement. If both the manager and the owner receive the statement directly from the financial institution, a potential embezzler may think twice about altering the statements or reports sent to the owner.

To check monthly statements, the management company should establish a system to ensure that one site’s funds are not commingled with another’s. One solution is to have a separate bank account for each site the company manages, and keep all funds received for that site in that account.

5. Ensure Adequate, Proper Insurance Coverage

Management companies usually maintain their own policy of fidelity insurance coverage. But such policies generally protect only management and theft by management. While insurance doesn’t prevent theft as effectively as internal disbursement processes do, insurance coverage will reimburse a site up to its limit in theft. Anyone who handles site funds should be bonded or insured, and in many states, bonds and insurance are required by law.

Insider Source

Gary B. Rosen, CFE, CPA: Shareholder, Wilkin & Guttenplan, P.C., 1200 Tices Ln., E. Brunswick, NJ 08816; www.wgcpas.com.