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Avoiding A Common Fraud

By Tom Crouch, CPA, CIA, CISA, and Attorney

	Web www.auditnet.org

Money stolen from a bank account is a very common fraud.  This usually happens in small organizations. These include small businesses, non-profit groups, churches, scout groups, and clubs.  In most of these situations, a minimum level of controls would have greatly reduced the fraud risks.  Adequate controls protect innocent people from suspicion of wrongdoing, which protects their reputation.  

The individuals who perpetrate these frauds usually have been given a high degree of control over bank account duties.  The perpetrators are usually people who are trusted by those with management responsibilities over the bank account. 

The people who commit these frauds are often among the most trusted people in these organizations.  Auditors often say “trust, but verify.”   If people with management responsibilities and adequate staff use the “trust, but verify” approach, they can avoid many frauds.

The key bank account duties include:

1. Preparing checks to be signed by an authorized check signer;
2. Reviewing and signing checks;
3. Matching the invoice or other supporting documentation to the check being issued;
4. Issuing the checks whether in person or by mail;
5. Preparing deposit slips and making deposits;
6. Matching supporting documentation to the deposit slip;
7. Posting the deposits, the checks issued, and the other transactions to a check register;
8. Receiving and reconciling the monthly bank statement (this should include comparing each check payee and amount to source documents and/or the check register); and,
9. Reviewing the bank reconciliation to ensure that it is consistent with the check register and other accounting records.

When one person handles all of these key bank account duties, there is a high risk of fraud.  A way to reduce fraud risk is to have each duty performed by a different person or group of people, but this is usually only feasible in large organizations.  If these duties can be separated among two or more people, the fraud risk drops. When two signatures are required on checks, or at least checks over a threshold level (such as over $500), the fraud risk is lower. Another risk reduction technique is to have other people randomly perform these duties once every six months, or at least once a year.  Bank employees are required to have a 2-week vacation or a 2-week separation of duties.

The most critical duties to separate are those related to receiving the bank statement, reconciling the bank statement, and approving or verifying the reconciliation (#8 and #9 above).  If the person who handles the reconciliation duties (#8 and #9) is different from the person who handles the other duties (#1 through #7), fraud risk can be reduced to an acceptable level. 

Money stolen from a bank account is a common fraud.  These frauds can be avoided by separating and rotating the bank account duties.