Fraud Prevention and Internal Controls

In my last installment, we reviewed how fraud and theft can impact smaller companies.  This week we will focus on vendor payments, company credit cards and expense reports.

In the bill payment process, companies are vulnerable on multiple fronts:

  • Purchasing or ordering should be segregated from approval of the charge.   Larger companies use purchase orders to achieve this function but simply having a senior person, other than the buyer, sign off on the invoice will improve the function.
  • Entering invoices for payment must be segregated from check signing authority.  If bills are paid electronically, then the approval of the file sent to the bank should not be housed with the person who enters the invoices for payment.
  • Require documentation for credit card charges.  Many companies, including those I have served as CFO, make effective use of company credit cards.  The card statements must be approved and reconciled to receipts or you are giving employees a blank check.
  • Expense reports must be approved by someone reviewing the supporting documentation, prior to payment to the employee.  With expense report software and inexpensive scanners, this can be achieved even when the employee and approver are in different locations.
  • Expense reports often require receipts only when the charge exceeds $25.  That is the IRS rule, your rules can be different.  All charges should be explained and justified and whenever possible supported by a third party receipt.  This is one reason I prefer a strong credit card program to manual employee expense reports.  The documentation on credit cards is usually easier to administer.
  • Maintenance of the vendor file should be subject to review and approval.  Changes to the file at a minimum should be reviewed before a disbursing run.  If the person can change the mailing address or bank account routing, they can send legitimate payments to themselves.
  • Use positive pay.  Talk to your bank and arrange to send an electronic file to them daily showing the check number, amount and payee of every disbursement.  If the check is submitted for a different amount, the bank will contact you to investigate.  You may be able to use this function to eliminate stop payment fees.  If you void the check, the bank will be on notice that the payment has to be investigated.

In my next blog installment, we will continue to explore this topic focusing on payroll controls.

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