Internal Controls Can Combat Fraud

When internal controls breakdown, an organization’s risk of fraud increases significantly. We recently conducted a fraud investigation for one of our clients where management believed funds were missing but had been unable to figure out how they were taken.

Our strategy was to isolate a week’s worth of activity to see if we could identify the scheme. We reviewed transaction reports and focused on the transaction codes that impacted either the cash balance or the check balance or both. Then, we reconciled the daily cash balance reports and the batched check reports to the teller’s transaction activity. That’s when we noticed discrepancies in both the cash and check balances for the teller’s drawer. We then expanded our scope to include the entire period and identified that the scheme was conducted in two ways:

• The perpetrator would submit a batch transaction that did not contain the correct number and amount of the checks processed in the batch. This caused a variance between the amounts posted in the ledger and the actual deposited funds received by the financial institution.
• More often, the perpetrator would submit legitimate checks received (several days after the batch transaction) from customers to support these transactions. Once the amount was too large to cover with customer checks, she began issuing official checks to cover the variance in the batch transactions.

During this period, the financial institution was not regularly reconciling the general ledger accounts, which allowed the fraud to go undetected for several years. Tellers were also not scanning images of checks as part of the batch process. Due to the fact the scheme was perpetrated by the head teller, her authority allowed her to conceal her activities:

• She had access to the general ledger account used for cash transactions. She was careful to process the transactions through this account and not through a customer’s account where it would appear on a customer’s statement and could easily be detected.
• Most of the fraudulent transactions were entered near the beginning or the end of the day or on weekends when presumably she was the highest-ranking management person present and there was less risk of someone uncovering her scheme.

Our analysis identified almost 300 transactions covering four years totaling over $500,000, which involved the disbursement of cash from the head teller’s drawer without corresponding checks being deposited into the financial institution’s account. 

It’s important to take a careful look at your internal controls. A simple habit of reconciling general ledger accounts, for example, can reduce your fraud risk significantly. If you are interested in learning more, conducting a forensic assessment or setting up a more sophisticated fraud prevention system, we are here to help.

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