How to Prevent Accounting Fraud in a Small Company
Posted on 16. Aug, 2008 by admin in Feature
Accounting fraud can strike any company, but small and medium size companies are especially vulnerable. Good accounting practices will help prevent the occurence of accounting fraud. Some basic guidelines for good practice that can be implemented by any size of business.
1. There is a greater risk for fraud when one person controls all aspects of the accounting. Owners should not let a direct hire accuntant be involved in every facet of the businesses accounting and financial activities such as handling the payroll, balancing receivables, preparing deposits, making payments to vendors, etc. This is a dangerous practice, even with a ‘trusted’ employee, and puts a company at risk for fraudulent activity.
2. Properly staff your accounting department so that work can be completed during normal working hours. A workaholic controller may seem like a ‘good employee’ to the owner of a medium size business, but working alone long after employees have gone home gives an employee opportunities to change/modify/create entries and commit fraud.
3. This is an extension of the workaholic controller idea presented in #2 above. Encourage all employees, including accounting employees, to take their vacation and holiday time. This provides an opportunity for another employee to perform their job duties and provides a set of ‘objective eyes’ that may notice if something is not in accordance with the company’s policies and procedures.
4. Don’t let a domineering controller or accountant take over and handle all activities without assistance from others. Be sure that more than one person participates in all meetings with third parties such as banks and consultants.
5. Be sure that document filing is always neat, orderly, current and up to date. This is a big one for many small companies. Many small companies are growing fast and are always under staffed. Disorderly records, stacks of vendor invoices, payroll records, expense reports, etc. are an open invitation for accounting fraud, because key documents can ‘disappear’.
6. Conduct internal audits. Audits are not just for big corporations. Just because everyone at a small company knows each other on a first name basis and goes to lunch together, doesn’t eliminate the need for audits. Procedures must be followed to prevent the chance of accounting fraud, and the best way to be sure that procedures are being followed is to perform internal audits on a regular basis.
7. Have an eagle eye for income and deposits. Better yet put procedures in place to verify income and deposits. Income is the life blood of the company and easily skimmed or otherwise manipulated. A heart surgeon recently discovered that an employee in his office was skimming about $150,000 per year. I guess he had a profitable practice!
8. Be vigilant and make occasion changes. Cross train employees to work in other areas. Bring in an accounting consultant for a complete audit of procedures. Use a good accounting software package. Have written procedures and be sure that all accounting employees follow the company procedures. Do not let employees work practices ‘go around’ or use ’shortcuts’ and insist that they follow the procedures.
Accounting fraud can strike any company and the most ‘trusted’ employees can be the culprit. While it’s not necessary to lose trust of employees, it’s necessary to develop tight procedures with built in safeguards to prevent an employee from being tempted. The Golder Rule is that it’s easier to prevent accounting fraud than it is to detect it after it’s happened.
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