Business Accounting

How to Protect Your Business From Accounting Fraud

2017-03-14 | by Gene B. Reynolds, CPA

Don’t wait until accounting fraud is committed! Now is the time to create internal controls that minimize your company’s exposure to the theft of cash and other property.

Here are the three most common types of fraud and the internal controls we recommend to reduce exposure to accounting fraud.

Accounts Receivable (AR) Fraud

According to the U.S. Department of Commerce, employee dishonesty costs American business in excess of $50 billion annually.

Even if you trust your employees, it’s still necessary to verify their work, so the assets of your company are not  targeted.

Common AR Fraud Schemes:

Skimming—An employee steals money before funds are recorded.

Lapping—An employee records payments to the wrong accounts to conceal a previous theft.

Substitution of check-for-cash— An employee replaces stolen payments with unexpected income.

3-Step Process to Reduce AR Fraud:

  1. The owner makes a list of all payments received from customers and then passes them on to the bookkeeper who records the receipt.
  2. The owner fills out a deposit slip, takes it to the bank, deposits it and returns the slip to the bookkeeper keeping a copy.
  3. The bookkeeper records the deposit in the accounting system which is the reviewed by the owner and compared to the list of payments from the customer.

This internal framework gives the owner control of the amount being deposited so they can stay up-to-date on their business’s finances. The owner should also monitor customer  accounts receivable aging and statements to ensure payments have been properly recorded.

Accounts Payable (AP) Fraud

Another common type of accounting fraud tricks you into paying fraudulent invoices.

Common AP Fraud Schemes:

Shell Company—An employee creates a fake vendor and bills you for services not provided.

Personal Purchases—An employee submits an invoice for non-work items.

Fraudulent Expense Reimbursements— An employee files a false expense report claim.

3-Step Process to Reduce AR Fraud:

  1. The owner opens bills and is mindful of the amount and vendor before giving it to the bookkeeper. Authorization to pay the invoice should be approved by the owner or someone outside of the accounting department.
  2. The bookkeeper records the invoice  in the accounting system and prints the check.
  3. The owner signs the check in person, comparing the check to the underlying invoices  and submits payment.

Never use signature stamps because they can be stolen and many banks will only accept hand-signed checks.

If your company pays bills by credit card, then the owner should handle bank and credit card reconciliations or hire a professional accounting and bookkeeping firm to assist. Though retrospective, this control gives the owner or a third party a complete review of the incoming and outgoing funds on a monthly or quarterly basis.

Payroll Fraud

The final type of accounting fraud we’d like to  highlight is payroll fraud which happens in 27 percent of all businesses.

Common Payroll Fraud Schemes:

Timesheet Fraud— An employee “forgets” to clock out or inputs the wrong hours/pay rate.

Ghost Employees—A  fake employee is created  as a way to divert funds.

2-Step Process to Reduce Payroll Fraud:

  1. An employee enters in the payroll timesheet.
  2. The owner or someone outside the accounting department  verifies its accuracy. The owner reviews the payroll prior to processing looking for approved time sheets that support the payroll and also to identify any employee payments that look suspicious.

If you would like to review the internal control processes for your business please contact Reynolds and Associates today!

About the Author

Gene B. Reynolds, CPA

Gene is the Founder and President of Reynolds and Associates, a Houston-based CPA Firm. He has spent 42 years helping Houston entrepreneurs navigate their enterprises through both calm and stormy waters.


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