identity theft and fraud
identity theft and fraud

Fraud: It Happens More Than You Think

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The threat of fraud is something many businesses don’t want to acknowledge or even consider. In my visits with accountants over the last several years, it’s apparent that many of them struggle with how to help their clients understand the magnitude of fraud, let alone protect their own firms and businesses from it.

One of the biggest areas of concern is check fraud, but the reality when fighting something like check fraud is that nothing is 100 percent safe. No check feature or prevention program i completely eliminate it. What we can do, however, is implement specific practices to discourage criminals from attempting fraud and, as a result, thwart potential counterfeiting efforts.

Awareness and Statistics

Research shows that most accountants feel it is their role to advise their business clients about fraud and its risks, yet I know that quite a few accountants, many of whom work with QuickBooks®, have a low awareness of fraud frequency, a.k.a. they believe “it’s not going to happen to me or my clients.” According to the latest Association for Financial Professionals Payments Fraud and Control Survey, the numbers are troubling:

  • 60 percent of businesses were exposed to actual or attempted payments fraud in 2013.
  • 82 percent of those businesses were victims of check fraud, almost half of all polled businesses.
  • $23,100 was the typical fraud-related loss experienced by these businesses.
  • Only 10 percent of these businesses recovered the full amount of money defrauded from them.
  • 30 percent of these businesses recovered nothing.

As you can see, the impact of payments fraud has been enormous, and can literally wipe out a small business almost immediately. As you come to grips with the realities of fraud occurring on a yearly basis, it’s time you take action and follow prevention steps to give yourself and your clients the best possible chance of avoiding a potential calamity.

Establish Internal Controls

Internal controls are good for your own practice, of course, as well as your clients’ businesses. You must have adequate internal controls in place, first and foremost, to ensure your company is safe. While the following may seem like small details, they can be reasons for getting exposed to payments fraud if not handled properly. Here are four basic, yet effective, controls:

  1. The business owner must take an interest in the books, monitoring financial reports on a regular basis.
  2. Provide oversight and perform random checks of accounting activities.
  3. Create clear AP roles by ensuring that the check signer is not the bookkeeper, making sure a different person mails the checks, controlling blank checks and watching the check numbers.
  4. Perform employee background checks.

Reconcile Regularly

The revised Uniform Commercial Code (UCC) requires an organization to exercise “reasonable promptness” in examining its monthly statements. The UCC specifically cites 30 days from the receipt of statement from the bank. Accordingly, banking customers must carefully read their bank’s disclosure agreement that details the length of time they have to report discrepancies on their bank statement. Some banks have even shortened the reporting timeframe to less than 30 days. Failure to reconcile promptly is an invitation for employees to embezzle because they know their actions will not be discovered for a long time.

Moreover, there should be a separation of duties within the statement reconciliation process. Specifically, this means that the people issuing checks should not be the same people who reconcile the accounts.

If banking customers are unable to reconcile their accounts on a timely basis, they should consider hiring an outside reconciliation service provider and have their bank statements mailed directly to the service provider.

Positive Pay

One of the most effective check fraud prevention tools is Positive Pay. Since its introduction as an automated check-matching service, Positive Pay has been unparalleled in detecting most bogus checks. Positive Pay services are offered through the cash management department of most high-performance banks.

To use this service, the check issuer transmits a file containing information about the checks it has issued to the bank. Positive Pay compares the account number, the check number, dollar amount, and sometimes, the payee name on checks presented for payment against the list of checks issued and authorized by the company. All of the components of the check must match exactly or it becomes an exception item. The bank contacts the customer to determine each exception item’s authenticity. If the check is fraudulent or has been altered, the bank will return the check unpaid and the fraud is foiled. For Positive Pay to be effective, the customer must send the data to the bank before the checks are released.

Because revisions in the UCC impose liability for check fraud losses on both the bank and its customer, it is in everyone’s interest to help prevent check fraud losses. When a company uses high security checks along with Positive Pay, the risk and liability for check fraud are substantially reduced. Many banks charge a modest fee for Positive Pay, but think of the fee as an insurance premium to help prevent check fraud losses.

High Security Checks

Check fraud prevention begins with high security checks. The physical check is the first line of defense in helping to prevent altered payee names or dollar amounts. There is substantial evidence that high security checks often motivate criminals to seek softer targets. Remember criminals are not looking for challenges. They are looking for opportunities.

High security checks should contain at least 10 safety features – and the more, the better. Many check manufacturers claim their checks are secure because they include a printed padlock icon, but keep in mind the padlock icon does not make a check secure; only three safety features are required to use the icon – and, in my opinion, that is far from adequate in keeping a check secure from counterfeiting, copying and alteration.

Some legal experts suggest that the failure of a business to use adequate security features to protect their checks constitutes negligence. By using high security checks, a company can legally demonstrate that adequate care has been taken to protect its checks. In the case of check fraud, business owners have to show they were diligent in their business practices in order to get reimbursed by the bank.

Examples of security features can be found in the check I designed with QuickBooks, which is now the most secure check on the market*, with features like an exclusive security coating to prevent tampering.

Final Thoughts

Check fraud attempts and bank check fraud losses fell by 95 percent over a three-year period after a West Coast Bank educated its customers and introduced high security checks and Positive Pay. There is no reason why you can’t play this role for your clients and your firm. It may be a steep learning curve, but when it comes to protecting your clients’ financial lives and well being, it is more than worth the time and effort. Get involved and take action today!

ProAdvisor Discount on Checks, Tax Forms and Supplies

QuickBooks ProAdvisors are entitled to an ongoing 30 percent discount on checks and supplies; order for yourself or for your clients. You can also pass along a 20 percent discount to your clients; direct them to Offers expire Dec. 31, 2015. Click here to get the offer.

*Based on feature comparison of high-security checks, conducted March 2014.

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