Beware of employee fraud in the digital payment age

Nov 17, 2021

Local governments are moving away from traditional paper checks to more efficient and lower-cost digital payments, such as direct deposit, automated clearing house (ACH) payments, electronic funds transfers (EFT) and wire payments. And the benefits are clear: You can pay a variety of vendors seamlessly, process employee payroll faster, and easily transfer funds between multiple bank accounts.

But alongside the benefits, beware: Digital payments also create new opportunities for employees to conceal and personally benefit from these payments.

This could be accomplished by simply changing the vendor's banking information in your payment system to divert disbursements to the employee's personal bank account.

Whether your government is small or large, the State Auditor's Office offers tips to help you improve monitoring of potential employee fraud.

Review your electronic payments regularly

Review the electronic payment remittance records that the bank provides as a receipt or confirmation of where the payment disbursed. Focus on the bank account routing and account number details, and compare this to your vendor's bank account information in your vendor master file. This information should match. If it doesn't, it could be an indication of potential employee fraud.

The accounting system may list a vendor payee, but you can only tell if that vendor truly received the electronic payment by validating who owns the ACH-recipient bank account.

Start reviewing vendor bank account records

Make sure to review vendor bank account changes, including ensuring you have documentation that shows the vendor asked for this change.

Perform an analytical review of vendor bank account information in your accounting system. Watch for multiple vendors that have the same bank account number information, because that is unusual.

Compare vendor bank account information to employee payroll bank account information. Be on the lookout for any employees who have the same bank account as a vendor, as this could be another indicator of fraud.

Review bank statements monthly

Scan monthly bank statements or online banking activity for electronic payments, evaluate the overall level of activity, and consider the type of activity (wires, ACH, EFT, etc.), frequency and reasonableness.

Be aware that ACH payments tend to be aggregated on the bank statement. For example, all payments made on the first day of the month might aggregate into one line item and corresponding lump-sum amount on your bank statement. That's why it's important to retain underlying supporting records, so that you can determine what makes up the lump sum and where the payments were disbursed.

As your government starts to use more electronic payment methods, it's important to be aware of the potential for employee fraud and to implement monitoring procedures. You can find more information about establishing best practices to prevent fraud on SAO's website:

#fraudweek