Fraud Prevention – A Necessary Evil

By Timothy Kennedy, CPA

Do you trust your bookkeeper? This is a question you have to ask yourself periodically. Not only do you want to feel confident that they wouldn’t steal from you, but you also want comfort in knowing that they can properly journalize and manage the accounting information that comes through the door each day. Poor accounting record maintenance and overall sloppy accounting by a lackluster bookkeeper can take you to the point of no return—and force your hand into considering the unthinkable, “I can do this myself!” Even if you feel totally confident in your bookkeeper’s abilities, or your own, here are some tips that can help prevent fraud, waste or sloppiness.

Process controls

These are procedures that are built into a process which help maintain the overall integrity of the data input and end product. Key processes are generally: cash receipts and revenues, cash disbursements and expenses and payroll. Process controls that we oftentimes see at our clients are: reviews of invoices versus purchase orders versus copies of checks (the three way match), approval of payroll timesheets by a supervisor and segregation of duties (person who signs checks does not reconcile cash accounts and person who opens the mail does not enter cash receipts into the system). These controls ensure a level of security so that one sole individual isn’t provided complete control over any given function to commit a fraudulent act and then subsequently conceal it.

Entity level controls

These are procedures that are ingrained within the organization as a whole and usually come from “the top down.” Examples of entity level controls would be an owner who signs all checks, an owner who approves all new vendors or customers, an owner who actively reviews monthly financial reports and cash activity, and an owner who provides a comfortable environment for all employees so that they aren’t afraid to speak up if they see something wrong. In addition, board of director oversight, a good policies and procedures manual, and risk assessment are common entity level controls.

Keep a close eye on cash

Although a wide range of things may come to mind when thinking of fraud, it generally comes down to theft of cash. Areas to watch out for are payroll fraud, when fake employees are setup by someone who is in the payroll function; paying phantom accounts payable, when fake invoices and related fake companies are setup by someone in the accounts payable function; or other honest mistakes which could be made such as double paying an invoice, never depositing a check, etc. which are not technically fraud but could put a dent in your bottom line.

The key as an owner or process controller is to pay attention to the minute details and monitor them consistently. Typically, your general and administrative expenses should be comparable from year to year since they are fixed costs. Your cost of sales accounts can be expected to fluctuate in comparison to your revenue since they are variable costs. Develop your expectations for the reports you are looking at and then question those that don’t make sense to you.

Similar to driving a car, if you take your eyes off the road for even a moment, you could end up in a bad predicament. It’s worth it to think critically, and not forget to keep the fraud triangle in mind; if there is pressure, opportunity and the individual rationalizes their actions—there may be a fraud risk.

Tim Kennedy, CPA is a Manager at Wiss with over nine years of accounting experience. Tim is dedicated to providing guidance on business, identifying audit and accounting issues encountered on an engagement, and maintaining communicative relationships with his clients. Reach Tim at 973.994.9400 or [email protected]

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