Accounting Fraud – What is it? Accounting fraud is the misrepresentation of financial information, as well as how those figures are recorded and reported.
In a general sense, all businesses have some degree of risk associated with the possibility of accounting fraud. However, this risk can be reduced or minimized by implementing certain practices within an organization.
10 Ways to Minimize the Risk of Accounting Fraud: Aron Govil
1) Require a Second Person to Approve Invoices
Verifying that all invoices have been approved by two people helps ensure that crucial errors cannot be made when recording transactions on your company’s books. A simple way to make this practice effective is for one worker to handle data entry while another sign-offs invoice for approval. This simple step will ensure that invoices cannot be approved without being seen by someone else.
2) Trim Dead Weight
Dead weight in large organizations is not always a result of intentional fraud, but it still represents a risk to the company. In order to combat this risk, companies should regularly review accounts payable and other types of budgets to identify “ghost workers.” These are employees who have been paid after leaving the company or were never truly hired at all. A simple way to avoid accounting fraud from dead weight is for companies to perform thorough background checks before hiring a new employee. By finding out facts such as where a potential applicant has worked before, an organization can map out their trajectory and confirm whether they actually exist.
3) Keep Track of Cash Balances
The more cash is available in an account, the higher level of risk there is for fraud to occur. It is important to be aware of how much cash is in your company’s accounts at all times.
4) Require Invoices to Match with Receipts
This simple practice, though not foolproof, eliminates a significant amount of accounting fraud because it requires individuals to record transactions on paper before processing expenses. It would be easy for someone to record an expense on the books if they were never actually recorded on paper nor did they ever take place. By requiring receipts and invoices to match one another, this process becomes more difficult.
5) Use Cheque-Protected Deposit Slips
Simply put, cheque-protected deposit slips reduce the risk of someone being able to alter a number when entering it into a computer system.
6) Separate Project Accounting from General Ledger
The best way to keep track of financial data is by having two separate ledgers for different types of projects within your organization. These practices will help prevent one project from skewing reporting for another part of the company, which can happen unintentionally if both are managed under one ledger or reporting structure.
7) Keep Detailed Documentation
Keeping detailed documentation on every transaction that takes place in your company’s books helps identify possible incongruities. When creating these reports, try using an automated system that uses algorithms and software programs to automatically generate reports based on certain criteria. While relying on this type of system is not fail-proof, it can help speed up the process of analyzing financial data and uncovering irregularities or errors.
8) Require Supervisors to Review Invoices before Approval
This process works in conjunction with approving invoices by two people within an organization. By having one person review invoices before they are approved for use by another individual; discrepancies between figures provided on the invoice and those recorded elsewhere become more obvious. Additionally, having individuals who typically do not work together go through this process helps reduce the risk of collusion related to accounting fraud within an organization.
9) Ensure Accounts Payable has Separate Office Area
Having separate office area for accounts payable helps prevent members of this department from being approached by other employees within the organization to approve an invoice. It also makes it more difficult for someone involved in accounting fraud to collude with an accounts payable worker outside of normal work hours.
10) Don’t Accept Old Purchasing Cards
Purchasing cards are often used by organizations that may not have extensive enough systems or processes in place to properly manage their cash flow. Companies should only issue these types of cards if they are able to make sure that they are keeping track of every transaction made using them, including proper approval . If you receive a purchasing card that has already been used, send it back and ask for another one that has not yet been activated. This is an easy way to reduce the risk of someone using a card for illegitimate purposes.
Conclusion by Aron Govil:
It is important to always be aware of the type of risk your company faces when it comes to fraud. These ten practices can help reduce this risk, but they are far from perfect. Even if you implement all ten of these suggestions, fraud can still take place within your organization. The best way to prevent accounting fraud is by having a strong set of internal controls in place that increase oversight and transparency within your organization. Internal controls work hand-in-hand with management to promote accountability throughout the company, resulting in more effective controls over financial activities that may occur on a daily basis.