Most companies believe their internal controls and procedures are adequate and will reduce the likelihood of fraud occurring. However, many companies continually grow and change, forgetting to test and adjust internal controls along the way.
One client of mine relied on internal control procedures that were in place when the department had only four employees. When the department grew to over 45 employees, the control procedure of having a supervisor approve all overtime hours was no longer adequate.
Unfortunately the supervisor and many staff employees discovered this gap in controls and colluded to falsify time records indicating that employees worked significant overtime hours. The employees and the supervisor would split the additional wages and defrauded the company for over $1 million in wages and variable benefits.
Simply adding an additional control to have a second approver outside of the department would have either caught or deterred the collusion all together or would have identified the collusion earlier and significantly reduced the loss. Don’t get frightened by staggering fraud losses – test, monitor and adjust!