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FOR IMMEDIATE RELEASE

Lohman Company, PLLC Releases Internal Control Checklist

Fraud Alert

May 16, 2003 -- This letter along with the attached internal control checklist was mailed to all of our business clients.  We thought this letter and its attachments might be helpful to you, your organization and your clients or contacts:

When was the last time you considered your exposure to employee embezzlement and theft?  Embezzlement deals with the misappropriation of a company's funds by bookkeeping and accounting personnel.  Theft deals with the broader area of inventory shrinkage due to employee theft.

Experience has shown that when a significant embezzlement or theft is discovered, it usually involves an employee who is trusted and has been with the company for an extended period of time.  The employee involved will also typically have an exemplary work record, a dedicated work ethic and be considered a "company person."  Additionally, if the employee involved did not have the implicit trust of the employer, the embezzlement or theft might not occur. 

A weakness in internal control structure may create a situation where dishonest employees can manipulate the system.  This breakdown might occur if the employer is extremely busy and does not have time to get involved in the accounting department.  Also, smaller companies usually lack numerical depth in their accounting department which precludes the implementation of strong internal control procedures.  When you combine the previous factors with the employer's feeling of total trust in the employee, the situation can prove to be very dangerous.

Many business people are not aware that the scope of a typical audit, review, compilation, tax or accounting engagement does not include specific services relating to the disclosure of employee fraud.  Therefore, the best way to safeguard your company's assets is to recognize and improve weaknesses in your internal procedures.  The following business practices can help you minimize potential internal control problems:

• Related duties should be assigned to different people.  Certain accounting functions are designed to cross-reference each other for accuracy, writing/signing checks, ordering/paying/receiving materials, handling cash/recording cash, etc.  These procedures can reveal inconsistencies in your records in a timely manner.
   
• Reconcile and scrutinize your bank statements every month.  A bank statement can tell you a lot about your business if you review the information in a timely manner.  Examine checks and endorsements; track transactions between accounts; compare payroll checks with employee records, and ask questions. 
   
• Always ask for proof before you sign a check or authorize a transaction.  When you insist on reviewing original documentation, your employees become more accurate and communicate their needs more clearly.  You should also verify the names of your vendors and your employees occasionally.  And, remember to cancel supporting materials after signing a check. 
   
• Lock and protect your valuables.  Keep blank checks and signature stamps secured, and deposit cash and checks daily.  It's also important to secure fidelity bonds and insurance for all accounting and key personnel. 
   
• Know your employees and examine behavior changes.  Always verify employee references before hiring and consider background checks with the employee’s approval.  Many white-collar crimes go unreported and continue to be repeated.  Watch for trouble signs:  possible substance abuse, change in lifestyle, living beyond means, possessiveness of work. 

These internal controls can help you reveal many discrepancies, as well as recognize the excellent efforts of your staff. 

In addition, please find an attached internal control checklist.  This checklist is not all inclusive, but highlights some of the internal control weaknesses common to closely-held businesses.  This checklist is also available at our website for future reference. 

Also, the American Institute of Certified Public Accountants (AICPA) and the Association of Certified Fraud Examiners have developed a one-hour training program entitled “How Fraud Hurts You and Your Organization.”  This program is free and may be viewed from www.aicpa.org/antifraud/training.

Our firm can help you develop and implement internal controls to address the weaknesses you identified and/or your areas of concern.

For More Information Contact:

Lohman Company, PLLC
Stapley Center
1630 South Stapley Drive, Suite 108
Mesa, AZ  85204

Phone:   (480) 355-1100
Fax:       (480) 355-1130
Internet: info@lohmancompany.com