Accounting fraud habits seem to be popping up everywhere these days. Many small business owners feel that their companies are immune to accounting fraud for two basic reasons: they don’t have many employees, and the ones who deal with money are usually close to the owners. But regardless of size, any business is vulnerable to fraudulent activities by employees. Dishonest people in large businesses can find numerous ways to misrepresent the financial condition of a company, including accounting for stock options, pension plans, derivatives and more. Just because small companies such as screen printing or embroidery shops don’t face these technical accounting challenges doesn’t mean there’s no potential for accounting fraud. With this in mind, it’s a good time to ask yourself, “What’s protecting my business?”
You can protect your business from both innocent typos and intentional accounting fraud by documenting fundamental pay outs and revenue procedures and identifying the number of people that could be involved. Check how your accounting system works, and identify what controls are in place and who has responsibility to exercise those controls. Inventory and cash must be counted. Liabilities need to be confirmed. Any increase or decrease in the equity since the last check is profit or loss. A system check does not protect you against accounting fraud or innocent mistakes, it just simply tells you the company’s financial condition after the fraud or innocent error has occurred. Many small business use this method because the company does not have systems controls in place, and because it is inexpensive. People do make mistakes that can cost an organization substantial amounts if the errors aren’t caught and that is what makes the systems approach essential.
Quantity, description, price and authorization for expenditure should all be documented In larger companies, the person preparing the purchase order and the person authorizing it are different people. It is advised that the owner alone should authorize all expenditures to prevent spending company money for personal use. The levels of approval required are determined by how much impact the decision could have on the company’s profitability. The more money at risk, the more care should be taken that the right decision is being made. Payback analysis and discounted cash flow analysis, measure how fast the business will recover the investment in the form of profits earned from the assets being acquired.
After shipping a received your order, the supplier accepts your terms and prices, regardless of what they are. The suppplier is obligated to get a corrected purchase order before shipping, if the price you entered on the purchase order isn’t correct. Once the item is shipped, it means that the offer has been accepted and contract has been completed.
Find out the costs of shipping by exploring the possible couriers. Choose the less expensive one and to control your fund expenses you might only ship in the mornings.If employees are authorized to disburse company funds, then rules should be established for when to select each option. Don’t select the “Best Way” as the shipping method when making a purchase becazse that is similar to handing the supplier a blank check. Suppliers often try to make profits when shipping, so its best that you alone check the possible shipment options. When the package arrives, weigh it and look up the cost if you were to send this item back to your supplier. Pay no more than that amount. When you check this out throughly, you will be shocked to find out how many companies charge shipping fees that are too high. Check your carrier if you can save money if you have a volume discount, and the class of shipment.
Every now and then count the items and compare the counts to the quantities ordered by yourself, even if you have a large company. Note the quantity received and verify any differences. Make sure the products received match specifications, such as colors, sizes and quality. Don’t compare the items received against the supplier provided list but by your own purchase order. Supplier could have entered the order incorrectly either on purpose or error.
Look at the paperwork for accounts payable. Here evidence for a purchase order is matched to evidence of something received and the supplier’s invoice. These documents were prepared by different people and if they all match, payment can be authorized. The probability of all three people making the same innocent error is nearly impossible and any missmatch at the calculations can only occur if all three conspire against the owners interests.
Save all bills and documents for at least two years, but recommended is too keep the forever. Documenting disbursement and revenue procedures protect against unintended loss. To be sure a company is profitable, the revenue and cost of every transaction must be measured. Some costs are incurred solely for the purpose of earning revenue, and are therefore easy to measure and document. Overhead, or period charges, such as rent, power, insurance and even salaries are more difficult to work with. Protecting your business from fraud is time-consuming and requires in-depth thought about the way your operation is structured. However, as more revelations of accounting fraud practices come to light, it’s obvious that the time it takes to put even the most basic safeguards in place is time well spent.
Signs of Accounting Fraud
- Someone insists that he or she handle activities for which other departments are normally responsible. Including picking up the daily mail, acting as the sole responsible person with the company’s financial contacts and working with police if items or money are found missing
- Someone continually works after hours, comes in frequently on weekends or insists on taking work home. Fraudulent activities are easier to accomplish when work is unobserved and unsupervised
- Someone refuses to follow recently established accounting guidelines. Owners should demand that guidelines be strictly followed and investigate financial and payroll records for up to several years in the past
- Someone works without direct supervision on all company’s financial operations. When one trusted bookkeeper is responsible for records, payroll, receivables, deposits, payments and so on and you notice that at the end of the month or year the numbers don’t match, this is the first place you should look at
- Someone refuses to take a vacation. This individual may be thought of as a highly dedicated and hard-working employee, but it could be that he or she simply doesn’t want anyone to discover any fishy documents
Owners should always carefully monitor income and deposits, comparing sales receipts against actual amounts put into the bank. There are no sure-fire tips for accounting fraud. But by being on the lookout a small business can avert a potentially disastrous and embarrassing financial loss.