Online Systems Can Bypass Internal Controls
Phil Kenkel
Bill Fitzwater Cooperative Chair
Most cooperatives have a good set of internal controls for transactions that help to prevent fraud. Tried and true controls such as multiple signatures and security of paper forms are increasingly out of date. In today’s cooperatives many transactions are conducted on-line. Electronic transactions increase efficiency but call for new types of controls.
It doesn’t matter how many signatures you require on a check if someone in the cooperative can make a payment online. Restricting the individuals who can make an online payment is useless if someone else can masquerade as the authorized user. Some banks have a verification service that checks the authorization of a payment before clearing. In other cases you may not be able to prevent an unauthorized payment from happening. In that case you should have a strong procedure to detect it on a timely basis by reviewing online payments statements and bank statements. A good system of password security is also important. Ask yourself, if someone in the cooperative made an unauthorized payment how would they do it and how would we know?
If your employees are paid by direct deposit the person who initiates the payroll transactions has the same power as a check signer. Payroll schemes such as declaring an extra payday, giving oneself a raise or paying a terminated or fake employee (while redirecting the funds to the perpetrator’s account) have been around every since there were paychecks. The issue is that anyone who can initiate a payroll transaction or fool the system into thinking they have the authority to initiate a payroll transaction can now potentially pursue this type of fraud. Again, ask yourself: How would we know? Your cooperative should have a system where an independent individual reviews all of the payroll transactions coming directly from the payroll system and not just a report coming from the individual initiating payroll.
An old public service announcement encouraged motorist that not leaving their keys in their cars helped to keep good boys from going bad. Transaction fraud is not a common problem in agricultural cooperatives. Nevertheless, the board and management have a responsibility to design and maintain an effective internal control system to safeguard the cooperative’s assets. In today’s economy it is vital for cooperatives to pursue increased efficiency. Electronic transactions do just that. Just take a moment to consider whether your electronic systems have bypassed any of your internal controls.
10-25-13