Block opportunities for fraud Featured

7:00pm EDT December 26, 2007

Technology has opened doors for fraud. Counterfeit checks that are produced on a home printer with basic software can fool a seasoned banker. In many cases, it’s impossible to tell the difference between an honest check and a well-crafted imposter.

“Even the most honorable person who is faced with a financial calamity in his or her personal life may attempt fraud,” says Craig Johnson, president and CEO of Franklin Bank in Southfield, Mich.

The key to preventing fraud includes a combination of segregation of duties, involving a third party to help audit the books and taking advantage of tools designed to lock out opportunities for fraud.

Here, Johnson provides a banker’s perspective on common fraud activity and what you can do to prevent it at your work-place.

How can a dishonest employee manipulate check stock, and what can employers do to make counterfeiting more of a challenge?

Fraud involving checks has increased exponentially over the last several years with the advent of technology and the ability to scan documents. The payee and dollar amount can easily be changed, and a bank can mistake the tampered check for the real thing. As an employer, you can protect yourself by purchasing a quality check stock with watermarking and other security features so banks, customers and vendors will recognize it as an ‘official’ check from your company. Cheaper check stock is much easier to copy. Also, if you produce your own check copy in-house, keep the stock under dual control and away from the general staff. In other words, do not give the key to the check safe to the same person who is responsible for all financial transactions.

What are other ways that businesses are defrauded?

Checks may be intercepted by an employee responsible for billing or accounting, and the payee may be altered. The check can be rerouted into another account and cashed at another financial institution. The check will post as cashed on the company books, but several months later, the supplier who was supposed to receive payment may call and say, ‘We never got paid.’ This is an instant red flag. Employees responsible for issuing checks and balancing the bank statement have an opportunity to issue checks to themselves, fictitious vendors, family, friends, etc. The issuing of checks and the reconciliation of the corporate checkbook should be segregated duties. One way to detect possible fraud is to run a report of employee social security numbers and addresses against your vendor or supplier list. Any ‘hits’ must be thoroughly investigated.

How can technology work to an employer’s advantage?

You can avoid the above scenario by using Internet banking. Set up Automated Clearing House with major suppliers so you can pay them electronically. You’ll have more control over payment timing, and you’ll log a virtual paper trail that cannot be altered by employees at your company or the payee’s organization. If your financial institution offers ‘Positive Pay’ take advantage of this service. By using Positive Pay, it is harder for individuals to counterfeit or alter a stolen check and have it post to your corporate account. If the check number or amount is wrong or if the specific check number has already been paid (duplicate check), the check will be rejected and will require a representative of the company to intervene and make a pay or return decision.

Provide employees with a toll-free number they can call anonymously to report fraud in the company. For a nominal fee, you can subscribe to a service that fields these calls and communicates concerns to a key person at your company. Offering your staff a confidential way to say, ‘Something’s wrong here,’ can go a long way to preventing fraud before it gets out of hand.

What are other fraud red flags?

The last thing an employee will discuss at work is personal financial struggle, but this is almost always the impetus for fraud. Consider the fraud triangle: motivation, opportunity and rationalization. In today’s environment of high gas prices, record foreclosures and, in many cases, uncertain career futures at consolidating companies, there is plenty of motivation for employees. Be observant and know your employees well enough to recognize these obvious changes in their lifestyles. Does an employee never take vacation or leave his or her desk? This could be a sign that he or she must stay on top of fraudulent activities. Requiring employees in key areas to take a one week vacation (consecutive days) each year will help in this area. There is a good chance that if something is amiss that it will be discovered during this time.

CRAIG JOHNSON is president and CEO of Franklin Bank, Southfield, Mich. Reach him at clj@franklinbank.com or (248) 386-9860.