Tough economic times can bring out the best and the worst in people. While everyone would like to believe that all employees act ethically and responsibly all of the time, fraud does happen. Clubs should take a closer look at their fraud insurance and take proactive steps to reduce their risks. The first step is being able to identify the most common instances in which fraud is committed. Here are the top five for businesses in general:
1. Forging checks – Employees looking to commit fraud may forge their own name on a check written out to the club and then deposit it into a personal bank account.
2. Fictitious vendors – Employees can fabricate a vendor profile and create fraudulent invoices, which are then sent to the club. When the club sends checks to cover the costs, the employees deposit the funds in the fake vendors’ bank accounts—which are really their own.
3. Forged invoices – Employees can also leverage legitimate vendor invoices to generate additional funds by falsely inflating amount on the invoice—leaving the employees with the difference.
4. Fictitious or “ghost” employees – Payroll clerks may send salary checks every week to fake employees and deposit the checks in a bank account they control.
5. Fraudulent expense reports – Employees can fabricate expenses that appear to be legitimate, and the report is often signed off on by a superior, who may not have looked it over carefully. Company credit cards can also be used for personal expenses, even if they are intended solely for club expenses.
Once clubs know what to look for, they can take steps to reduce their risk. According to Melissa Schwartz, vice president of management liability/fidelity at Liberty International Underwriters, here are some ways that employers can reduce their risk:
1. Distribute sensitive duties among multiple employees to ensure that different people reconcile bank accounts, write checks, and deposit money. If control over the financial process is distributed, employees have less opportunity to commit fraud and there is a greater likelihood that it will be detected if they choose to do so.
2. Mandate that finance staff takes paid vacations. Employees who are engaging in fraudulent behavior will often forego time away from the office so that they can ensure nothing goes amiss and they are not uncovered in their absence.
3. Regularly review your vendor list to ensure that all vendor information is accurate and verifiable. Also, seek bids every three years from existing and new vendors to ensure that your club is not only getting the best deal, but that you are aware of the actual cost of services rendered, in order to discourage fraudulent bill inflation and make it easier to detect.
4. Conduct background checks of potential hires and extensive examinations of individuals recruited for sensitive finance positions to ensure that there is no history of unlawful behavior. Clubs should still keep in mind that just because there is nothing to indicate unethical behavior, that does not mean that individuals are incapable of committing fraud in the future.
5. Conduct regularly scheduled audits of protocols and processes, in addition to unscheduled spot audits that are unannounced until they occur. Consistently auditing your club’s business transactions is a sound practice, and surprise audits are a good way to discourage fraud, since employees will be wary about not having ample time to prepare or cover their tracks.
6. Work with insurance professionals to beef up anti-fraud measures and transfer remaining criminal risks to an insurance company. Even when looking to cut costs at your club, ensuring that you are protected against fraud can help save your club money in the long run.
Constant vigilance is a good first step to discouraging fraudulent behavior at your club, but it is no substitute for seeking sound professional advice and ensuring that your club is insured against the risk. Once fraud is uncovered, it might be too late.