Small Business Fraud, Part 3

In previous blog posts, the risk exposure of fraud to businesses and initial prevention measures were highlighted and discussed. Considering the significant exposures, it is worth an additional explanation and review of the suggested minimal steps to decrease the likelihood of a fraud in your business.

A monthly review of financial statements is always considered best practices for executive management. Tremendous insight is gained from a properly prepared set of managerial financial statements. The highest performing businesses incorporate financial statement reviews into their business planning and decision-making efforts. Specific to fraud prevention, deterrence counts a lot. The mere act of a detailed review and focused questions relating to the monthly financial statements yields a significant barrier to anyone attempting to defraud a business.

More specifically, reporting against a management approved budget is critical. This typically comes in the form of Budget to Actual reporting and follows a consistent pattern within a business. The development of a budget is management’s opportunity to ensure fiscal resources are expended in a way that supports the larger goals and vision of the company. Budgets provide a first line of defense against spending that is not consistent with management’s expectations. When reviewing Budget to Actual spending, it is important for management to note any spending that is +/- 10% of budget. Such variances should always be tied back to a specific business decision and easily noted. Additionally, variances in excess of +/- 10% of an approved budget should require an additional approval processes.

It is also important to review financial statements in conjunction with the accountant’s working papers. Every accountant uses a series of worksheets to prepare a set of financial statements. The working papers/worksheets include items like bank reconciliations and fixed asset schedules. Having the detailed paperwork accessible when reviewing financial statements will allow the reviewer the opportunity to ask specific questions and ensure that a properly formulated monthly close out process has been performed. Implementing the structured use of a monthly closeout checklist and working papers will not only add an additional layer of prevention as it relates to the potential of fraud, but will also contribute to ensuring the accuracy of financial statements.

It is important to recognize that a majority of financial fraud is accomplished through the use of journal entries. On a periodic basis, it is important for a management team to review and understand what journal entries have been posted to an accounting system and why. It is not a coincidence that one of the first action items any audit team takes in the performance of a formal audit is to review every posted journal entry. Journal entries are, by definition, designed to facilitate the posting of non-cash accounting transactions. For example, the posting of depreciation expense or realized deferred revenues are common uses of journal entries. Therefore, any journal entry posting a cash, bank or credit card account must be closely scrutinized. If payroll is entered into an accounting system as a journal entry, to include posting to a cash/bank account, then monthly payroll reports should be reviewed as well.

Fraud is extremely important for a business to avoid. Outlining clear financial reporting and deterrents within your business can go a long way towards prevention. TGG implements these kinds of policies and procedures within our client’s organizations. For help with implementation or simply to have a fraud assessment performed, call TGG Accounting today.

Written by:
Andrew Ruff
TGG Accounting



Sorry, comments are closed for this post.