Eight Practices That Help Prevent Fraud in Your Agribusiness

Published on October 25, 2016

Agribusinesses that become victims of employee fraud tend to place unrestricted trust in those they shouldn’t — including the credentialed controller or CFO they hired to help run their business. In fact, sometimes the individual who commits fraud is a long-term employee in a finance role. These individuals have the capability of doing the most damage, so it is important to use financial and operational protocols that remove opportunities for fraud.

Fraud in agribusiness
As an agribusiness, you may have been a victim of internal fraud, and it occurs more frequently than you might imagine. Though the patterns of theft and the results were all different, the victims shared five similar shortcomings:
• Leadership failed to establish a tone of vigilance in the organization.
• Employees did not know how to report suspected fraudulent activity.
• The part-time or absentee owners trusted their fraudulent employees completely.
• They either did not have internal controls in place at all or those they had were not followed.
• The perpetrator was caught by chance, not through systematic fraud controls.

You should not regard trustworthy employees as crooks. But unless you recognize that internal theft is a risk inherent in every business and take measures to keep it from happening to you, you leave yourself vulnerable. Establishing appropriate protocols isn’t punitive; in fact, it helps honest, hardworking employees do their jobs even better. Over the years, the following eight practices have proven most effective at preventing and unearthing employee fraud.

1. Segregation of all accounting duties
It’s unwise to give one individual control of all functions in the finance department. There should be clear and distinct separations of assignments for accounts payable and receivable, cash and bank reconciliations, receivables write-offs, and customer credit card refunds. These lines of separation are basic barriers to fraud.

Once you have cordoned off these various internal functions, you should make sure that all finance personnel are cross-trained in each of them, including (and especially) those that fall in the controller’s realm. Hoarding knowledge can cloak misdeeds.

2. Monthly cash reconciliation to the penny
Train multiple people in your finance department to perform this essential chore. It is a good idea to rotate the individual who performs this task from time to time. This should also apply to receivables, inventories, and payables. Further, create a culture and tone at the top where small discrepancies are not acceptable.

3. Mandatory vacation
Make sure key finance personnel are cross-trained and make sure they take vacation. Breaks from the office are good for employee health and morale. Vacation also ensures that key responsibilities are shared, and that no one’s work is done in isolation. This simple policy allows others to appreciate their co-workers different roles — and makes it difficult for fraud to go undetected

4. Bank and credit card statement review
Develop a process for opening all bank and credit card statements. The responsibility may be shared between owners, board members, managers, or supervisors. Bank statements should include copies or images of all cancelled checks, so management can review the vendor names to ensure they approved the vendor posted in the accounting system.

5. Annual vendor audit
Every year, pull a list of all your vendors and corroborate each one’s corporate name, physical address (post office box is insufficient), owner’s name, and phone number — then call that number and speak with a live person to verify the vendor’s authenticity. Develop a process to approve new vendors and follow it.

6. CPA spot checks
Agribusinesses are wise to engage a certified public accountant to drop in unannounced to inspect the books and controls onsite. An eagle-eyed review of the journal and general ledger can detect some of financial acrobatics, like checks reclassified to another account or a big employee receivable moved to customer receivables and written off as aged. The inspection itself will be valuable, but you can also monitor your controller’s reaction to the announcement and behavior during this event.

7. Data analytics
As your operation grows, so can your susceptibility to fraudulent activity, as it becomes more difficult to monitor the increasing number of transactions. Using your software programs to analytically review data can help detect unusual or unexpected activity. For instance, data analytics can be used to sort all checks by vendor or dollar amount to reveal unusual vendor names, duplicate payment amounts, or unusually even dollar amounts.

Fraud in the grain industry has been uncovered that pointed to collusion between grain marketers and producers. A good data analytics test might be to extract all scale tickets for the year and look for tickets to one customer that might equate to more bushels than the customer could possibly deliver. Many of these tests can be accomplished in minutes.

8. Implementing a fraud policy and encourage whistleblowers
It is important to set the proper tone within a company, and have discussions about internal controls and where there might be room for improvement. One way you can do this is to implement a formal fraud policy. This can be as brief or as detailed as you see fit. The following are essential components of a fraud policy:
• Define what fraud is.
• Explain the options an employee has if they suspect fraudulent activity.
• Outline the process that owners, management, and the board will take if fraud is reported.
• Detail the consequences of fraudulent activity.

This policy is meant to be a working document and should be discussed and communicated to employees on an annual basis.

Employees who suspect or witness fraud often keep their suspicions to themselves because they fear retribution. You can demonstrate you are serious about preventing and prosecuting fraud by establishing a fraud policy and an anonymous fraud hotline.
(Source:  CliftonLarsonAllen – Agribusiness Perspectives – September 27, 2016)