I recall a case of a farm maintenance manager who created a fraudulent company to bill his employer for repair work. The scheme was to have the employees in his department actually repair the equipment and then his fake company would bill the farm for the work done.
The farm owner was aware that the work was done, so he was not suspicious until he asked the employees about some of the repair work. When the dust settled, there was about $400,000 in fraudulent charges over a three-year period. The reason he was able to get away with it for so long was because the farm owner was so far removed from the operation of the farm.
Unfortunately, this is just one of many examples of fraud, or asset misappropriation, that occur in farming businesses. Fraud takes place in large and small operations. In fact, studies have shown that smaller companies have higher incidences of fraud than larger corporate ones.
Fraud often goes undetected because of complacency by business owners. No one wants to believe that such deception can happen in his business. Yet our experience with clients reminds us again and again that fraud can happen to anyone, and it does.
You can fight fraud by being aware of the risks and proactively preventing them. Here are some areas where you should be especially vigilant:
Look for red flags in payroll
Payroll fraud usually occurs when an employee makes false claims for compensation, causing an employer to issue payment or overpayment. This can appear as “ghost employees,” inflated commissions or falsified timesheet hours. Salaries are more challenging to manipulate, but both salary and hourly amounts have been altered before. Submitting fraudulent expense reimbursement requests is another area of fraud often related to the payroll function.
Be careful with employee loans
This area often overlaps the payroll system. Use caution when issuing employee loans and advances. Make sure they’re appropriately monitored. These can disappear from the financial statements in small enough amounts that the financial reader wouldn’t be alerted that something out of the ordinary is happening.
Examine your receipts
To make sure payments are being applied directly to the appropriate customers, someone in your business needs to periodically audit a group of receipts. Someone committing fraud can steal money and begin moving deposits to cover their tracks. A particular customer account may appear in your system as if it was paid, when in actuality it wasn’t paid with their check—a possible signal of attempted fraud.
Scrutinize checks and invoices
Your office procedures must include the process of comparing check registers from your accounting system to the actual checks that clear the bank. Here’s one way fraud can occur: An accounts payable clerk can write a check to a vendor and have an authorized person sign the check. The clerk, however, can then change the payee name before the check is mailed out.
Another area to watch: grain suppliers and other vendors sending multiple invoices for the same product. Remain vigilant and systematic about reviewing all invoices. Make sure you match them to statements to detect any fraud attempts as well as errors.
What you can do to fight fraud
You can prevent and detect fraud in these ways:
Segregate responsibilities. This includes separating the duties for preparing, disbursing and distributing checks. Also remove the personnel function from the payroll task. I understand this isn’t always feasible when you have a limited number of office staff. In that case, consider an alternative strategy, such as occasionally rotating responsibilities. That not only helps prevent and detect fraud but also benefits your business with cross-training, which can bolster back-up capacity for the times when someone is out of the office.
Require employees to take vacations. It’s worth thinking about forced vacations. That doesn’t mean taking over employee vacations plans but simply verifying that they’re all taking time off. Many banks require employees to take vacation in one-week increments to assure that any potential fraud tied to the office procedures of a particular day of the week can be more easily prevented or detected. No business should ever let an employee fail to take vacation time without wondering why.
Watch employee behavior. Another possible signal of fraud is the employee who seems to be clearly living beyond his or her means as evidenced by expensive clothes, vehicles or travel. Further, managers often have noted in retrospect that those involved in fraud were experiencing significant personal or financial stresses that may have played a role in triggering the wrongdoing.
I’m not advocating that you look on employees or vendors with suspicion or distrust. But strict office procedures are necessary to defend against the possibility of fraud. Even family members and others who were regarded with trust have committed fraud. Rather than viewing stricter controls in office procedures as a burden, employees should be encouraged to feel protected from potential suspicion and accusation that may arise, even unfairly, in an office that operates chaotically and haphazardly.
As the manager of your business, set the tone that your workplace is one of consistent integrity. That will attract and please honest employees. Further, virtually all fraud prevention strategies make good business sense and will boost your operational efficiency.
Editor’s note: Doug Claussen has more than 20 years experience with his agriculture and accounting expertise at K·Coe Isom as he helps ag business owners with financial, operational and tax challenges. He works with agribusinesses involved in beef production, dairy operations, grain production and marketing. Contact him at [email protected].
