CASE 4: CHANGING THE PAYEE ON CHECKS
Sometimes, it’s the most obvious of fraudulent acts can elude even the best of internal controls. In this instance, an organization engaged a bookkeeper to track and pay all bills, which he did meticulously. There was a copy of a bill, and all documents were reviewed and signed by the ED before a check was issued. Financials were reviewed regularly by the board, as well as the expenses by vendor report I discussed earlier. There was even a board member who reconciled the bank accounts monthly.
The only problem was that periodically, the bookkeeper would enter the check as being paid to one entity in the accounting system, but would actually write the check to himself. When it was finally caught, the ED felt embarrassed that she hadn’t caught it earlier. However, it hadn’t occurred to her that someone would actually fraudulently write a check to themselves. After all, this leaves a paper trail of the offense. Yet, unless someone looks at the copies of processed checks from the bank, the fraud can go undetected for quite awhile. This is especially true if the perpetrator opens, and tosses, the past due notices from the actual vendors.
Preventive Internal Controls:
1) Review processed checks: One obvious answer is to have someone who is not paying bills review processed checks from the bank. Most banks these days keep the actual checks, but provide images of the checks as part of the bank statement. Some will charge a fee for this service but it is well worth it.
2) Segregation of Duties: An equally obvious answer is to not have the same person who creates checks for payment also be a signer on the account. If a signature stamp is used, make sure the person creating the checks has no access to it.
Repost by Gregg Bossen, CPA