Collusion is an ugly word but one that we need to address. Unfortunately, that is exactly what happened at MillerCoors when one of their marketing executives colluded with service providers. The service providers would either bill for services not provided or overbill and then split the difference with the marketing executives.
The case garnered headlines when law enforcement got involved. Uncovering this type of crime is exceedingly difficult and hence often goes undetected. Therefore, it is key that every organization take the necessary steps to protect themselves. The controls can be broken into two categories: people controls and process controls. Let’s take a look at some of them.
The controls around staff are fairly straightforward, yet many organizations are quite lax about utilizing some of them. Basically, they boil down to:
- Appropriate segregation of duties;
- Job rotation of staff (including invoice processors) dealing on a regular basis with suppliers and
- Mandatory vacations for everyone who has anything to do with the organization’s finances.
When setting up your invoice automation routines, you can make sure that the segregation of duties requirements are integrated into the model. That way, no one can play games.
While most organizations have a good handle on the segregation of duties issues, very few take the other two seriously. When queried about it, they indicate they don’t think it is necessary to take these steps. If your organization falls into the large group that doesn’t incorporate job rotation and/or mandatory vacations into their policies, then it is important that all process controls are utilized.
When a fraud involving an insider does occur and an investigation undertaken, the culprit is most likely to be a long-term trusted employee. That is just one of the reasons why controls around people are so very important and no exceptions be made.
Strong internal controls built into the standard accounts payable process clearly help. These should include:
- Dual reviews of new vendors in master vendor files;
- Surprise audits – especially of petty cash boxes; and
- Anonymous hotlines
Having new vendors in the master vendor file reviewed by two separate individuals reduces the risk of collusion. However, keep in mind, if the second reviewer is a subordinate of the submitter they are less-likely to point out potential problems. For this reason, some accounts payable departments now do a separate verification of new vendors. Again, this will help limit risk, but not completely eliminate it.
Probably the most effective tool in detecting frauds (of all sorts) but especially those that are difficult to uncover, like collusion, are anonymous tip lines. Today these anonymous lines can include both a telephone line and an email address. Both should be monitored by a third party separate from the organization’s day-to-day operations. By far, this is the most common method for finding fraud.
Collusion doesn’t happen often, but when it does, it can be devastating. What’s more, if the colluders are smart about what they do, it can go on for many, many years. Hence, preventing it in the first place is critical. Don’t stick your head in the sand thinking it would never happen in your organizations. Hopefully it won’t. But hoping isn’t an effective fraud deterrent. Take the necessary steps and incorporate strong controls as discussed here.
Mary S. Schaeffer, a nationally recognized accounts payable expert, is the founder of AP Now, a company that creates business intelligence on all issues impacting the accounts payable and payment function. She is the host of the AP Now Podcast.