Managing cash flow Featured

7:00pm EDT February 28, 2007

Fraud is one of those loss areas that threaten all businesses. Check fraud is the number one vulnerability, but businesses need to be aware that there are other kinds of fraud, too.

Smart Business spoke with Lori Wood, treasury management banker with 20 years experience at FirstMerit Bank, Columbus, about how treasury management works, how businesses can recognize areas where fraud can occur and how to avoid fraud.

First, what is treasury management?

Treasury management involves managing the cash flows of business accounts. Banks provide cash management solutions to businesses that are designed to help speed collection, control payments and manage funds more efficiently while minimizing risk.

Banks differ in the number of services they provide and the clientele they serve. Commercial banks offer a full range of treasury management services to their customers.

Can you describe some common fraud vulnerabilities?

Check fraud is one of the largest challenges facing businesses and financial institutions today. The fraud starts with someone stealing a blank check from an office, home, unlocked or burglarized vehicle; by searching for cancelled or old checks in the garbage; or by removing a check you may have mailed to pay a bill from the mailbox. Businesses are prime targets of check fraud. Payroll checks appear to be a favorite as far as counterfeiting and alterations.

Positive pay and direct deposit are a couple ways for business owners to protect themselves from this type of fraud. To eliminate cancelled checks being stored, a company may choose check imaging. Paper documents are replaced with a digitized replica (on CD-ROM). A special customer identification number provides an extra level of security.

How about electronic fraud?

Electronic fraud, also known as ACH fraud, becomes more likely for business owners who do not implement dual control of their financial accounting for internal and external purposes. Companies need to monitor account activity on a daily basis in order to return any fraudulent items.

There is also great vulnerability when sharing account numbers and routing numbers over the phone or online for purchases or bill payments. A person should never release account information over the phone unless they originated the call. Even then, I recommend using a credit card instead of a debit card.

Don’t audits help prevent fraud?

Every business should conduct frequent audits. Treasury management online banking allows authorized business personnel to monitor user activity along with controlling the dollar amounts of internal transfers, electronic transfers and wire transfers.

I also recommend that business owners divide and switch duties periodically. Companies should consider assigning a different employee to manage each function, such as check writing or reconciling accounts. Upper management approval should be required on manual checks and/or certain dollar amounts. Check stock should be locked at all times and audited on a regular basis.

What can a bank do to help a business minimize fraud?

There are several ways. Positive pay is designed for companies of all sizes. The client sends the bank, via electronic transmission, an issue file (including voids) whenever checks are written. The bank cross-references items being presented for payment. Any mismatches in the serial number, account number and dollar amount are sent to the customer. The customer simply responds with a ‘pay’ or ‘no-pay’ decision by phone or fax.

This process can also be reversed with reverse positive pay. The bank prepares a file listing the check number and dollar amount of items being presented for payment and sends it to the company early in the morning. The company compares the clearing items from the banks check file to their records and instructs the bank to return items that do not match.

Companies may also choose to block all incoming ACH debit or credit transactions, or both. When a block is placed on an account, the company should be very careful not to give out that particular account information to avoid a legitimate item being returned as an unauthorized corporate debit. There are also ACH filters that allow the company to block all ACH items except those specifically defined.

LORI WOOD is treasury management and public funds banker for FirstMerit Bank in the Columbus Region. Reach her at