Fall 2008 issue of Horizons

knowledge. commitment. value. CERTIFIED PUBLIC ACCOUNTANTS AND BUSINESS CONSULTANTS

Be Vigilant for Fraud

Ghost Employees – Under this scheme, the embezzler enters fictitious employees into the payroll system after they have left their jobs or keeps terminated employees on the payroll and receives the resulting payroll checks. Possible Controls: A “surprise” distribution of payroll checks by someone independent of the field and payroll operations is a good procedure for detecting this fraud. Construction Theft – Construction equipment and tools are attractive targets for thieves. Possible Controls: Restrict access to job sites by physical security measures, require proper identification to enter worksites, and engrave or spray-paint a distinctive logo on the equipment or tools. Photograph all equipment, maintain serial numbers and observe the equipment on a regular basis. Company Equipment – Another fraudulent scheme involves the use of company equipment, materials or labor to perform jobs on the side. The employees then pocket all of the revenue from the side jobs. Possible Controls: This type of fraud can be very difficult to detect. A “surprise” inspection of company equipment at night or on weekends may be effective in identifying unauthorized use of company equipment. This type of fraud often is discovered when an event (i.e. customer complaint, employee injury) occurs at the previously unknown job site. Implementing a strong system of internal controls is the best way to prevent or detect all of the aforementioned fraud schemes. Once established, the system should be periodically reviewed to ensure the internal controls are operating as designed. Although no company is 100 percent fraud-proof, solid internal controls and effective management oversight can keep your company from being victimized by the many fraudulent schemes that we have discussed.

By Frank Hogg, CPA

Contractors are vulnerable to fraud by the very nature of their operations, which usually involve numerous job sites and employees. In addition, fraud often becomes more prevalent during tougher economic conditions. The following are various fraud schemes that are common to contractors and possible controls that can be implemented to prevent or detect the fraud. Cash Disbursements – This type of fraud involves schemes in which the embezzler uses company checks to either withdraw cash directly for his or her benefit or to pay personal expenses. Possible Controls: Different personnel should be responsible for the authorizing, processing, recording and custody functions. Only authorized signers should sign checks. Someone independent of the accounting function should receive all bank statements, unopened, directly from the bank and thoroughly review all cancelled checks. Fictitious Vendors – A common type of fraud is payment of invoices to a fictitious vendor. This fraud occurs when the embezzler establishes a fake vendor and enters it into the company’s records as a legitimate one. Possible Controls: Senior management should periodically examine the company’s approved vendor list. Further investigation should be performed on those vendors that are unfamiliar to senior management.

Questions? Contact:

Frank Hogg, CPA Partner-in-Charge Contractors Services Group 314.290.3413 frank.hogg@rubinbrown.com

32 ◆ fall 2008 issue