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Monday, June 27, 2011

Use Available Weapons to Fortify Your Manufacturing Company Against Fraud


It’s been difficult enough to navigate your manufacturing company through the rough economic waters of the past two years. But while you were busy stemming the tide of customer defections and budgeting for rising raw material prices, another revenue-sapping issue has been growing increasingly problematic: fraud.

The Facts
The Association of Certified Fraud Examiners reports in its 2008 Report to the Nation on Occupational Fraud and Abuse (the latest numbers available at the time of this writing) that U.S. companies lost approximately $994 billion in revenue to fraud in a two-year period ending in 2008. Even more sobering is the fact that 7.2% of fraud cases occurred in manufacturing companies, accounting for a median loss of $441,000.

Unfortunately, your employees are a natural culprit because they have the most immediate access to funds and materials. Fortunately, there are steps you can take to reduce the chances of fraud at your company.

Focus on Employees
By knowing and empowering your employees, you can decrease the instances of fraud. How? First, perform background checks when hiring employees — particularly for financial and management positions. A thorough review can uncover any criminal convictions involving embezzlement, theft, forgery or other fraud.

Second, encourage workers to watch what is going on around them and to alert a supervisor when they believe theft or fraud is being committed. Protect employees who report fraudulent acts by providing a confidential means — such as a toll-free hotline — for them to express their concerns.

Finally, ensure employee compensation is competitive. Workers who believe they’re underpaid may be able to more easily rationalize committing fraud. Compare your pay rates to others in your industry and ensure that they’re competitive.

Use your CPA’s Knowledge
Your CPA can be a powerful resource in uncovering fraud and embezzlement. He or she can assist you in creating effective internal controls and help monitor bookkeeping records, invoices, bank statements, payments, journal entries, financial reports and other documents.

Ask your accountant to perform scheduled and unscheduled financial audits. Surprise audits can help identify potentially dangerous gaps in your controls and procedures and let your employees know that fraud prevention is a high priority.

Forensic accountants can also be useful. These fraud experts use their accounting, auditing and investigative skills to detect indications that your staff may be committing financial fraud. One telltale sign of fraud is growing accounts payable and receivable combined with dropping or stagnant revenues and income. Others may include excess inventory, a large number of account write-offs, and increased purchases from new vendors.

A fraud expert will examine your financial statements for these and other dangers as well as assess your company’s culture and business practices to determine what conditions may be causing fraud to thrive.

Don’t Overlook These Functions
Several key functions of manufacturing companies are particularly vulnerable to employee fraud and, thus, demand special attention. They include:

Cash management. Employees may steal cash on hand, divert cash receipts or alter bank deposits.
Inventory and fixed-asset management. Workers can steal company assets; divert and sell shipments; or use job materials, tools or other assets for non–job-related purposes.
Accounts receivable. Staff members might forge checks, grant fake credits or take fraudulent write-offs for bad debts.
Payroll. Employees may pay nonexistent employees, pad time records, falsify salaries or commit withholding fraud.

Implement a Fraud Prevention Policy
A good line of defense against fraud is a well-written fraud prevention policy. Explain your company’s code of ethics and include specific rules regarding the use of office supplies and company-owned equipment. Your policy should also spell out what constitutes fraud and how you will treat those caught committing it.

Make it clear that employees caught committing serious infractions will be terminated and prosecuted to the full extent of the law. In addition, state that policy violators will have to repay stolen funds or pay for stolen equipment. Finally, require all staff members to sign an agreement stating that they have read and understand your fraud prevention policy.

Protect What’s Yours
During tough economic times for businesses and individuals, it’s natural for fraud occurrences to rise. While you can’t completely safeguard your company against fraudsters, you can make it substantially more difficult for fraud to happen.

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