Before I pass on my thoughts on a salutary tale, let me add a disclaimer. I have nothing against accountants or bookkeepers, every profession has good and bad. the reason some of these points may appear directed at accounts staff is simply that they are in an axiomatic position with some frauds.
I now relay to you a case that I did some years ago, involving cheque fraud.
The fraud was a short-term fix: simple in its execution, and would have been detected had a better system been in place:
- A book-keeper kept and maintained the Company’s records, prepared the cheques, and recorded on the cheque stubs, details of the payee.
- The book-keeper then presented cheques to be signed by an authorised signatory of the Company, which were mostly blank and were to be filled in according to the payee listed on the cheque stub to which the cheque related.
- The records mostly matched the Invoices to which they related, as did the cheque stubs, but the cheques were written out to a shell company, or 3rd parties who had no connection with the Company.
- Since the book-keeper was also in charge of debt collection and account reconciliation, chasing of Invoices by legitimate Companies could be delayed by several months.
- So for example, a cheque payable to a supplier of office equipment, would appear received, and recorded as paid on a cheque stub on a specific cheque number, could not immediately be traced as an unauthorised payment for several months.
What were the factors that allowed fraud to prevail ?
1. This book-keeper had a son who was a drug addict, and needed funds to maintain his supply of drugs;
2. The book-keeper rationalised her behaviour insofar as the needs of her son were greater than the needs of the Company, and she did it out of love and necessity, or else how would her son cope? Tough love;
3. She knew the system: the system was poor, and the opportunity to commit fraud was there.
What happened next ?
Once the book-keeper knew her Company was onto her, she wrote and falsely signed cheques for all legitimate debts, which cause the Company to suffer a huge cash-flow dilemma with no available cash to launch an injunction freezing assets.
The Police were slow to investigate and the Company went into Liquidation.
What should have happened ?
Had the appropriate checks and systems been in placed, the opportunity would less likely have arisen.
If the employer had been more aware of its business, and staff, a pre-emptive strike could have been made to obtain a Freezing Injunction on her Bank accounts.
What could have been done to prevent fraud occurring ?
1. There should be 2 signatories to a cheque over a certain amount;
2. Never, never, never leave post-dated blank cheques anywhere ever. Perceived opportunity for fraud;
3. Always segregate responsibility and duties in terms of accounts, cheque preparation, book-keeping, debt collecting, and reconcilliations;
4. If cheques are being prepared on your behalf, check that the cheque name corresponds with the Invoice/Bill being paid;
5. Always have your Accounts independently audited to ensure there is independent verification and reconcilliation.
The writer is Partner, Head of Litigation at Darlingtons Solicitors and a fraud expert, a working member of the Fraud Advisory Panel, and an Associate Member of the Association of Certified Fraud Examiners.