Quick and Inexpensive Fraud Testing Procedures

Finance Directors and Controllers today are tasked with guarding their organizations against an ever-changing landscape of external threats. But, too often the risks under their own roof can be overlooked. Occupational fraud is a very real threat that can have devastating consequences for organizations. According to a 2024 report by the Association of Certified Fraud Examiners[1], organizations lose an estimated 5% of revenue to fraud each year with a median loss per case of $145,000. While no system of policies and procedures can fully protect against the threat of employee perpetrated schemes, there are several easy monitoring techniques that can be used to aid in detecting such activities.   

Professional fraud examiners use specialized training, software, and tools to search for possible fraudulent activity. While most organizations rarely have such resources at their disposal, there are still effective procedures that can be done by financial and accounting department leaders using Microsoft Excel to address common fraud risks, specifically those related to cash disbursements.

Cash Disbursements to Vendors

The following procedures can be performed by exporting non-payroll cash disbursement data from the accounting system to an Excel schedule:

• Create a PivotTable to subtotal vendor checks count and dollar amount. The information in the PivotTable can be reviewed to identify abnormalities in the frequency or dollar amounts paid to specific vendors. For example, you may find that a vendor that should be receiving payment on a monthly basis had extra payments during the year that were not expected. This procedure is also an effective way to review for any non-payroll payments made to employees.
• Add a column to the data with the formula “=weekday(Disbursement Date)” to identify any cash disbursements that were made on a weekend date. This could highlight instances where an employee attempted to evade controls by cutting checks or initiating cash disbursements while nobody was present in the office.
• Search for checks written to “cash” using a filter or the “find” feature (Ctrl+F) in Excel to locate instances where cash was disbursed without a specific vendor as a payee. While there could be a legitimate reason for such disbursements, there is undoubtedly a high potential for misappropriation.

Payroll Disbursements

The following procedures can be performed by exporting payroll cash disbursement data from the accounting system or payroll register reports to an Excel schedule:

• Create a PivotTable to subtotal payment count and gross pay dollar amount by employee. The information in the PivotTable can be reviewed for gross pay during the fiscal year that appears higher than expected or a higher payment count than would be expected. The names of employees could also be compared against employee roster to identify whether possible “ghost” employees are on the payroll.
• On sample basis, select timecards/reports for individual hourly employees and pay periods to verify that the number of hours worked match the number of hours they were paid for per the payroll register. This procedure is especially important for employees that have access to the payroll processing software or data inputs.

In addition to performing procedures to help detect occupational fraud when it occurs, understanding the circumstances that allow fraud to happen are of equal importance

There are typically three elements present that motivate individuals to commit fraud: Pressure, Opportunity, and Rationalization, often referred to as the fraud triangle. One key component of the fraud triangle is that the individual committing the fraud needs to have “an opportunity” or at least a perceived opportunity that they can commit the fraud without being caught. By simply asking questions of staff members related the results of the Excel procedures listed above, you are letting your employees know that some degree monitoring is present. This could cause employees to perceive less of “an opportunity” to commit fraud.

Consistent monitoring, including the use of procedures described in this article, can be a powerful tool in the detection and deterrence of occupational fraud for any organization. When instances of known fraud have occurred or are suspected, the engagement of a Certified Fraud Examiner or reporting to law enforcement may be necessary.

[1] Association of Certified Fraud Examiners – Occupational Fraud 2024: A Report to the Nations