accounting fraud

a.     Accounting Fraud Overview

                                                    i.     Definition of fraud.

1.      A deliberate act (or failure to act) with the intention of obtaining an unauthorized benefit by using deception or suppression of the truth.

                                                   ii.     Definition of corporate fraud.

1.      Dishonest and illegal activities perpetrated by an individual or companies in order to provide advantageous financial outcomes.

                                                 iii.     Definition of computer fraud.

1.      Using a computer to take, alter, or hide electronic data, OR using a computer to gain unlawful access to a computer system.

                                                 iv.     Basic components of a company’s accounting system

1.      Accounts payable – keeps records of good and services you have paid for (i.e. what you owe), and makes sure expense get paid

2.      Accounts receivable – keeps records of what is owed your company, including creating and tracking invoices, and processing the receipts of payment

3.      Payroll – making sure your employees are paid properly

4.      Financial Reporting – all the above functions feed into a General Ledger that can be used to report on the status of a company, i.e. the company’s equity (i.e. worth) is equal it’s current assets (money, property, and inventory) + all of its liabilities (unpaid bills and other debt). Equity = Assets + Liabilities

5.      Finance – with larger companies, personnel may be dedicated to determine how the business is funded, how to maximize profit and minimize loss, and investing corporate assets to create income

                                                   v.     Bookkeeper vs Accountant

1.      Bookkeeper – handles the day-to-day entry of financial transactions

2.      Accountants – provide reports, analysis and advice, and accounting reports

3.      A small company could have the same person doing both functions.

                                     vi.    Business Fraud comes in 3 Categories

1.    Misappropriation

a.      Stealing cash before it has been recorded

b.      Making false reimbursement claims

c.      Taking non-cash assets from the organization

2.    Corruption

a.      Employees use their influence to benefit themselves

b.      Such as bribery, extortion, conflict of interest

3.    Financial Statement Fraud

a.      Omitting or intentionally entering incorrect information in financial reports

b.      Such as fictitious revenue, hidden liabilities, or inflated assets

                                                vii.     Internal Controls to Prevent and Detect Fraud

1.      Use checks and balances to ensure no one person has control over all parts of a financial transaction

a.      Requires purchase, payroll, and cash disbursements to be authorized by a second party

b.      Don’t let the same person who is receiving or depositing money record the transactions in the accounting system

c.      Separate purchasing (the people who authorize orders) from payables (the people who authorize payments)

d.      Don’t let the person writing the check also authorize the check

e.      Require supervisors to authorize time sheets

f.       Require accounting department employees to take vacation (so someone else can temporarily do their job and see what is happening with that person’s work duties)

g.      Reconcile bank accounts every month (i.e. the statement from the bank should match exactly with the information that was recorded in the company accounting system)

h.      The person doing the bank statement reconciliation should be someone other the person who is entering the check information into the company accounting system

i.       Examine the cancelled (i.e. cashed by the bank) checks to make sure you recognize the vendors, the reason the check was issued, and the signature of the person signing the check

2.      Restrict use of credit card to business-related items

a.      Have a written policy on company credit card use

b.      Set card limits

c.      Require itemized receipts for all purchases

d.      Examine monthly credit card statements for inappropriate charges

3.      Evaluate revenues and expenses against a planned budget

a.      Require written explanations for large deviations from the planned budgets

b.      Have independent auditors periodically evaluate the yearly financial statements

4.      Have written policies as to how financial procedures are handled and approved

5.      Make sure that company assets are only used for company business

6.      Petty Cash controls

a.     Limit access to petty cash

b.      Require receipts for all petty cash reimbursements

7.      Check writing controls

a.      Don’t create checks payable to cash

b.      Deface and retain voided checks

c.      Store blank checks in a locked cabinet

d.      Do not sign checks until all required information has been entered on the check

e.      Require two signatures on checks above a specified limit

f.       When a check is issued, mark the appropriate invoice “Paid” and record the check # used for that invoice

g.      Enable any audit trails on accounting software

8.      Cash and Check collection controls

a.      Immediately record all cash and checks received

b.      Issue receipts for cash using pre-numbered receipts

c.     Reconcile (match) cash receipts with the documentation that recorded the original transaction

9.      Be cautious of hiring relatives of company employees or doing business with employee relatives

10.   Once you produce a financial statement for a period (month or year), close that period (to prevent hiding transaction in a previous period)

11.   Have unique user IDs for each user in a computerized accounting system (so individual auditing and event logging is possible)

12.   Know you employees; watch for signs such as changes in behavior that might indicate stress or a need to commit fraud for financial reasons

13.   Create an employee reporting system for reporting suspicious behavior

14.   Hire experienced (preferably external) auditors on a periodic basis or to look for evidence of fraud as needed