Check Tampering: One of the Most Common Frauds

February 10, 2014

The following scenarios are far too common in American small businesses and cost victim companies a median loss of $143,000.

• An employee regularly steals blank checks from his company and makes them out to himself or an accomplice.
• An employee steals outgoing checks to a vendor and deposits them in her own bank account.

Check tampering – a scheme in which an employee steals company funds by intercepting, forging or altering a check drawn on one of the organization’s bank accounts – is one of the most frequently committed crimes in American companies.

Where does check tampering happen most?

Check tampering is three times as common as payroll fraud or skimming and happens much more often in small businesses than large ones, according to the latest report of the Association of Certified Fraud Examiners (ACFE).

Check tampering is a crime that is far more prevalent in America than in other countries. And there are certain types of businesses that have a higher incidence of victimization:

1. Charitable, religious and social services

2. Construction

3. Professional services

4. Health care

5. Insurance

Not surprisingly, one third of check tampering crimes take place in the accounting department of a business, and once a scheme begins, it takes a long time to discover it – a median of 30 months, the fraud examiners’ report found. The only misappropriation scheme that takes longer to detect is payroll fraud.

How should blank checks be protected?

To be successful in a check tampering scheme, a perpetrator must have access to checks and bank statements, as well as have the ability to forge signatures or alter other information on the check.

It is essential, the ACFE says, to safeguard the check stock. Management should:

• Maintain checks under lock and key.
• Limit access to those employees with check preparation duties.
• Seal boxes of blank checks with security tape.
• Periodically check the security of unused checks.
• Promptly destroy voided checks.
• Print checks on watermark paper with security threads and distinctly marked paper.
• Investigate out-of-sequence canceled checks and duplicate check numbers.
• Reconcile each day the first check of the day to the last check written the previous day.
• Order checks and deposit slips through an established source, making sure they arrive in a timely manner. Report any missing check orders immediately.

Tampered checks are made payable to the perpetrator, an accomplice, vendors or “cash.” The forgery may be free-hand, photocopied or created by an automatic check-signing instrument that produces a perfect forgery, the ACFE says.

In addition to safeguarding the check stock, other steps to prevent check tampering are to:

• Establish rules for custody of checks that have been prepared but not signed.
• Separate duties of the check preparer and check signer.
• Rotate authorized check signers when possible and keep track of authorized signers.
• Strictly limit access to signature stamps.

How can forgeries of third-party checks be prevented?

In a forged endorsement scheme, an employee intercepts a company check intended for a third party and signs the third party’s name on the endorsement line of the check. The perpetrator may be involved in delivery of the checks, may reroute or steal the check, or may take advantage of poor company controls of signed checks.

Another way dishonest employees steal third-party checks is to alter the payee designation. Sometimes letters or words are tacked on to the end of the real payee.

The accounts payable system is typically also manipulated and the payee’s name changed. There is less chance of discovery with this method unless the canceled checks are reviewed during reconciliation, according to the ACFE.

To prevent theft of outgoing company checks:

• Separate the functions of check preparation, signing and delivery.
• Train employees to look for schemes involving check theft.
• Investigate vendor and customer complaints.
• Identify duplicate payments.
• Restrict authority to make changes to vendor records.
• Require periodic reports listing all changes to vendor records.
• Investigate canceled checks with dual endorsements and non-payroll checks signed by an employee.
• Chart the mailing date of all outgoing checks so that if a check is stolen, you can determine who worked in the mailroom on the date it was stolen.
• Conduct surprise audits.
• Do background checks on employees before hiring them to avoid hiring someone with a history of fraud.

What methods are used by perpetrators who prepare the checks?

An employee who prepares a company’s paychecks and has the trust of the boss may be given signed blank checks to process. A more sinister means involves erasable ink from a typewriter, pen or pencil.

To prevent altered company checks created by the check preparer:

• Separate the duties of check preparation, signing and delivery.
• Separate the duties of check preparation and check reconciliation.
• Check canceled checks against the entry in the books.
• Consider using carbon copy checks to check for discrepancies.
• Maintain up-to-date vendor lists and confirm all disbursements.

An employee may prepare a fraudulent check and submit it along with legitimate checks. This often occurs when the check signer is busy or inattentive, or perhaps out of the office. Since the check signer is relied upon to provide a certain level of prevention, requiring dual signatures for disbursements over a certain amount could provide added controls.