Protection From Accounting Fraud
Posted on 01.10.13
Author: Douglas K. Nickerson, CPA, CGFM, CFE, CIA
Accounting fraud is defined as the intentional misrepresentation or alteration of accounting records regarding revenues, expenses, financial reporting and other factors for either personal gain or gain to the business or entity. The early 2000s seemed to be the golden age of accounting fraud cases; but over the past few years the spotlight has dimmed on these big and complex accounting fraud cases. Regardless, it is important for all businesses, including state and local governments, to have in place certain controls to minimize exposure. Here are 10 important accounting tips to keep in mind.
- Ensure there is sufficient segregation of duties so that no one individual has more than one of the following: access to assets, the ability to record transactions and record keeping responsibilities. (An example of this would be accounting personnel who has control of the checkbook, maintains the cash receipts and disbursements journal and receives and reconciles the bank statements.)
- For all disbursements above a specified amount, require two signatures for approval of checks. Also consider utilizing your financial institution’s Positive Pay services.
- Require and document multiple bids on all purchases above a specified amount.
- Conduct surprise cash counts or inventory (of supplies, saleable goods, property and equipment) counts at least twice a year.
- All employees should take their full vacation allotment, with at least one full week taken consecutively.
- Incorporate a vendor audit clause into all purchase agreements that allows the customer to review or audit the vendor’s records for that customer.
- Develop a code of conduct that defines and expands the government’s mission statement and explicitly states what types of behaviors are unacceptable, as well as the consequences of violating the code. Have all employees read the code and sign a document stating that they have read the code, understand it and agree to abide by it. Require that all personnel sign a re-affirmation of the code annually.
- Perform thorough background checks of all employees prior to hiring.
- Communicate a zero-tolerance policy for any fraud, dishonesty, conflicts of interest, or other prohibited practices.
- Maintain a hotline or other anonymous reporting mechanism for employees to report unethical behavior without fear of retribution. Provide a feedback mechanism so that employees reporting suspicious activity can learn the outcome of their calls.
These will not entirely safeguard a government entity from accounting fraud cases, but is a good start to ensuring that the right tone at the top is set for employees to understand the severity of accounting fraud.