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12 Ways to Combat the Escalating Rate of Check Fraud
This article is reprinted/republished by the express written permission of IOMA (The Institute of Management & Administration). ©2007; for more information about IOMA publications visit www.ioma.com
Despite a tighter corporate internal control environment, check fraud in AP is increasing. Four in 10 (39%) of AP professionals we recently polled say they have had an indication or actual occurrence of check fraud in the recent past. The results of this poll form the basis of our report, AP Department Benchmarks & Analysis 2007, which analyzed responses from almost 500 AP departments.
Sitting Ducks
Because of advances in technology, it's easier to perpetrate check fraud. Many of the largest companies seem to be ripe for the plucking-70% of companies with 5,000 or more employees report some check fraud activity over the past two years (Exhibit 1).
| Exhibit 1. Indication or Occurrence of Check Fraud in the Last Two Years, by Number of Employees |
| |
Yes |
No |
| Up to 99 |
19.6% |
80.4% |
| 100 to 499 |
22.0 |
78.0 |
| 500 to 999 |
27.5 |
72.5 |
| 1,000 to 4,999 |
51.2 |
48.8 |
| 5,000 & up |
69.5 |
30.5 |
| Overall |
38.9 |
61.1 |
| (Source: AP Department Benchmarks & Analysis 2007) |
This is up from 59% in 2005. Small companies have more of a handle on controlling it, although, of course, they have less check volume than larger companies. Check fraud cuts democratically across all types of businesses, but the highest incidence occurs in retailing, according to our survey. Fraudsters keep away from the government, as only 15% of these entities say they've had check fraud trouble over the past two years (Exhibit 2).
| Exhibit 2. Indication or Occurrence of Check Fraud in the Last Two Years, by Industry |
| |
Yes |
No |
| Manufacturing |
44.1% |
55.9% |
| Financial Services (banking, insurance, etc.) |
18.2 |
81.8 |
| Government |
15.4 |
84.6 |
| Health care |
41.4 |
58.6 |
| Nonprofit/Education |
39.4 |
60.6 |
| Retail trade |
63.2 |
36.8 |
| Services (business, legal, engineering, etc.) |
31.8 |
68.2 |
| Transportation/communications/utilities |
53.6 |
46.4 |
| Wholesale trade |
44.4 |
55.6 |
| Other |
83.3 |
16.7 |
| (Source: AP Department Benchmarks & Analysis 2007) |
Rate of Increase Slowing
In 2005, 36% said they experienced check fraud, which was up from 24% in 2003. The rate of increase from 2005 to 2007 (36% to 39%) is much less than from 2003 to 2005 (24% to 36%). It's safe to conclude that all of the internal control requirements of the Sarbanes-Oxley Act have tempered the rate of increase. But be that as it may, companies must remain vigilant against check fraud, as rapid advances in technology have given fraudsters new ways to perpetrate the crime.
#1 Way to Fight Back
Check fraud involves counterfeiting or altering checks issued by AP. Also, blank check stock can be stolen. A company's best way to battle check fraud is to use "positive pay," a service offered by banks. The company sends its bank an electronic file of the checks it issues. The file, which is essentially the check register, contains information about the check number and dollar amount for each account. Before a check is honored, it is matched against the file. Checks that do not match are not paid and reported back to the company. There's a variation on positive pay that uses electronic character recognition technologies to compare the payee information on the checks to the payee information the company provides to the bank. This procedure, known as payee verification, eliminates the risk that a check will be paid after the payee name has been fraudulently altered or erased and a different one substituted. Almost two-thirds (64%) of all companies we polled use positive pay (Exhibit 3), up from 52% in 2005-and more than twice the percentage in 2003.
Use of positive pay increases sharply as the size of the company increases-from 37% in companies with less than 100 employees to 88% of companies with 5,000 or more employees (Exhibit 4).
The use of positive pay at smaller firms (up to 500 employees) has greatly increased since 2005. For example, 15% of companies with less than 100 employees used positive pay in 2005, versus 37% today. Because check fraud can strike any industry, all sectors report a significant use of positive pay. But it is used most heavily in the transportation / communications /utilities, retail, and manufacturing sectors (Exhibit 5).
11 Other Techniques
In addition to positive pay, here are some other important ways to combat check fraud:
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Reconcile the corporate checking accounts (check accounts and electronic payment accounts) regularly: some companies do it daily
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Don’t have the same employees perform disbursement and reconciliation duties
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Limit access to digitized check signatures or signature plates
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Store check stock in a secure location
-
Use separate accounts for checks and electronic payments
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Control the access to payment processing areas
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Replace employee paychecks and expense reimbursement checks with direct deposit
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Have two levels of security administrators for electronic payment systems and wire transfers
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Use laser-printed checks (in favor of pre-printed checks) that have security features built in (for example, encoded with the word "void" that only appears if the check is scanned)
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Print the payee’s address on the check, in addition to the payee’s name, to prevent someone from intercepting the check and opening an account in another state
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Require that all checks be mailed—they should not be given to company personnel who say: "I’ll deliver the check to the vendor."
Final Point
Don’t wait until your company has been targeted for check fraud before implementing internal controls to guard against it. At a minimum, institute positive pay and anything else your bank offers, such as debit filters and debit blockers.
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