How can I detect employee fraud?

Q. We have a medium-sized retail business with several employees involved in various aspects of financial operations. While all of our employees in this area are trustworthy, we would feel better knowing that our internal controls provide adequate protection against employee fraud and embezzlement. How can we be sure?

A. You're right to insist on good internal controls, even when your employees appear to be trustworthy. According to Edward J. McMIillan, a Maryland CPA and national expert on the subject, in almost every situation in which fraud has been discovered, the guilty party has been the person above suspicion!

Here's how most fraud is detected: during the course of a CPA audit, 2 percent; as a result of an internal audit, 18 percent; from information provided by a "whistle-blower," 30 percent; and by sheer accident, 50 percent. So you can see the importance of rigid controls.

Mr. McMillan has prepared a 17-question checklist to help you gauge the adequacy of your internal control system. Questions include:

• Does your organization require two signatures on every check?

• Does the CEO or designee open and review bank statements and cancelled checks before accounting does?

• Are all checks either computer-protected or imprinted with a check protector machine?

• Do you require all employees to take vacation?

• Does the CEO or designee control the supply of unused checks, and are they under lock and key?

For the complete questionnaire, contact Mr. McMillan at 301.627.2733 or emcmillan@sprintmail.com.