Common accounts receivable fraud in small businesses

Accounts receivable fraud is any intentional theft or misappropriation of company revenues. According to the 2009 Global Fraud Survey, the average loss due to accounting occupational fraud is $180,000 per occurrence. Accounts receivable fraud is particularly prevalent in small business often due to a lack of segregation of duties. Cash receipts are particularly vulnerable because they can be recorded in the accounts receivable journal and pocketed for personal gain. Undetected A/R fraud will result in a significant disruption of cash flow and even threaten its very existence.

Common concealment methods include lapping, fraudulent write-offs or discounts, stolen statements, force balancing, and debiting old/fictitious accounts. Lapping is the most common method and the most difficult to detect. Lapping involves stealing customer XYZ’s payment and applying customer ABC’s payment to XYZ’s open A/R balance. This creates a “lapping” effect covering the original theft with subsequent customer payments. Fraudulent write-offs and discounts are also difficult to detect because the customer account will reflect a current A/R balance, when in fact, the incoming funds have been stolen and discounted in the books to reflect or erase the difference. Stealing or altering account statements occurs when the only way to cover the fraud is to modify or eliminate source documents. Force balancing can occur in the absence of segregation of duties for both collecting and posting payments. The incoming check is stolen and cash balance during the bank reconciliation process is forced into balance.

Fraud prevention does not have to be an expensive undertaking. There are three key methods to use when thinking about fraud prevention:

  1. Segregation of duties is by far the most effective fraud prevention tool. Separating these duties will significantly lower the risk of fraud. Without proper controls, company assets can easily be converted to personal property. It is critical to identify where these duties can be split to minimize the risk of fraud.
  2. Mandatory vacations and switching of job duties will also detect and prevent fraud.
  3. Implement incentive or anonymous programs to report fraudulent activity. An anonymous tip could be the difference between a $180 loss and a $180,000 loss.

Free from the risk of fraud, a business is positioned to thrive and develop a culture of honesty and integrity.

Written by:
Jake Cavanagh
TGG Accounting

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