In my previous blog post, a framework regarding fraud in the small to mid-sized business world was presented. Fraud is a real risk to any business and is often very expensive. In this blog I will explore the idea of “an ounce of prevention is worth a pound of cure.”
Internal controls and separation of duties are two technical accounting terms often used when talking about fraud prevention. Most fraud can be prevented by boiling down these technical terms to… 1) Ask questions and 2) Not letting one person perform all of the tasks relating to a specific function (like payroll, processing vendor payments, or accounting for customer remittances).
Highlighted below are four key items that will go a long way to deterring fraudulent behavior.
1) Reviewing Financial Statements: Executive teams that require monthly financial statements with a formal review process in place are less likely to experience fraud. The basic function of reporting financial performance and having one’s work product reviewed creates a natural deterrent. The format of the review process should include details and supporting schedules that tie directly to the presented financial statements.
2) Separation of Duties: Never should one individual have all of the responsibility within an accounting department. Examples to consider are:
- Vendors: Ideally, three different individuals would be ordering services from vendors, entering those bills into an accounting system, and signing remittance checks. At a minimum, the individual signing remittance payments should be different than the individual entering invoices.
- Payroll: Approving timesheets, preparing payroll, and approving payroll should be performed by three different individuals.
- Customers: Three different individuals should approve invoices for customers, collect remittance checks, and deposit the remittances to the bank.
- Banking: The individual(s) responsible for posting most of the transactions to an accounting system’s general ledger should be different from the person performing monthly bank reconciliations.
3) Budgeting: The development of an annual budget and comparing actual performance against budgeted financial performance has proven to be a good deterrent for fraud. First and foremost, fraud usually involves “burying expenses” in a financial statement. By reviewing budgets to actual financial reports, budget overruns will be more easily identified.
4) Setting the Standard: It goes without saying, but it is critical that leaders in an organization set the ethical standard.
Fraud is a real risk all businesses face. Implementing effective internal controls and clear separation of duties are critical to fraud prevention. TGG Accounting can help set up and sustain this process. Call us today.Written by: Andrew Ruff TGG Accounting