The recent fraud sentencing of a Pawtucket, Rhode Island woman who kept insurance checks for vehicle repairs when she was an office secretary at an auto body business serves as a cautionary tale for collision center owners. Two CPA organizations recommend having a system of checks and balances in place to avoid schemes that could prove costly not only financially but to the reputations of businesses.
For two years, beginning in 2016, Idalee Johnston, 48, fraudulently pocketed more than $220,000 from nearly 200 checks provided to customers by their insurance companies to pay for vehicle repairs by not having them sign direct payment forms or by not forwarding signed payment forms to insurance companies, according to the District of Rhode Island U.S. Attorney’s Office. Johnston pleaded guilty to mail fraud on Oct. 13, 2021, and was sentenced Feb. 17 to two years in federal prison followed by two years of federal supervised release. She was ordered to pay $220,083 in restitution to the owners of the auto body business that she defrauded.
“As a result of her actions, insurance checks to pay for repairs were sent directly to customers who, in turn, at Johnston’s direction, provided the checks to her as a representative of the business,” a press release from U.S. Attorney Zachary A. Cunha’s Office states. “Johnston previously admitted to the court that she deposited some of the checks into her bank account. In other instances, stolen checks were provided to family members to be deposited into their bank accounts, and later, at her direction, these family members provided her with most of the funds.”
Repairer Driven News spent some time researching what small businesses can do to prevent fraudulent acts and found some tips from CPA firm Gross, Mendelsohn & Associates as well as the California Society of CPAs.
Gross Mendelsohn recommends putting a series of internal controls, or checks, into place to prevent fraud, including segregation of duties, regular audits, management review, employee codes of conduct, and anti-fraud training for management and/or employees.
Segregation of duties and management review are the two most important steps to prevent fraud, according to Gross Mendelsohn. Segregation of duties ensures one employee doesn’t have too much control over business operations.
“For example, a business where an accounting clerk writes the business’s checks and manages the business’s bookkeeping has inadequate separation of duties,” a blog post on the firm’s website states. “The accounting clerk in this instance has too much authority. He or she can write checks to themselves, their friends, or family and, because they control the bookkeeping, they can disguise the fraud from the business owner.”
Frequent management review should be on-site and entail reviewing records on a regular basis, including checks written, deposits and journal entries made, invoices issued, and invoices received. Being on-site allows for a comparison of machinery and inventory available to determine if payments that have been made are reasonable, according to Gross Mendelsohn.
- Screen potential employees thoroughly including checking past employment, personal and professional references, and criminal records;
- Keep accounting duties separate such as opening mail, processing payments, making bank deposits, paying invoices, handling petty cash, and reconciling bank statements;
- Have bank statements mailed to the business owner’s home or post office box to allow for review of them before the bookkeeper;
- Arrange for surprise audits;
- Create an ethical work environment and a no-tolerance culture through employee orientation, training, and other communications so that all employees know what constitutes fraud, what the consequences would be for carrying out fraudulent activity, and what steps the business takes to detect fraud;
- Ensure all employees take vacation time because “research has shown that employees who are committing fraud sometimes resist taking a vacation because they must remain on the job to cover up their fraudulent activity. For some employees, just knowing they must take a vacation every year is enough of a deterrent;”
- Don’t limit your focus to financial fraud – also be mindful of the theft of confidential information and trade secrets;
- Consult with a CPA to discuss measures that can be taken to help prevent and detect internal fraud.
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