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What Are You Doing To Reduce Your Fraud Risk?
– January 18, 2012

Risk 
The term "fraud" is now appearing on a frequent basis in the financial news. While today’s accounting professionals are much more in tune with the risk of fraud existing within the business environment, very seldom are they engaged to specifically detect fraud. Unfortunately, more often than not, they are engaged after the fact to quantify it.


It is management that is ultimately responsible for the design and implementation of programs and controls to prevent and detect fraud within their companies. The following checklist highlights items to be addressed in key areas that can provide you with some guidance in the detection and prevention of fraud within your business.

 

BANK STATEMENTS

  1. Have them mailed directly to management, preferably to their home address.
  2. Review them before they are reconciled, paying close attention to numerical sequence, alterations, authorized signatures and unfamiliar payees.
  3. Never deliver them to your accounting personnel before opening them.
  4. If bank statements are sent electronically, management should log on and review cleared items from time to time randomly; it would be a good practice to send inquiries to different personnel regarding this review of the cleared items so the bookkeeping staff knows the statements are indeed being scrutinized.

ACCOUNTS RECEIVABLE

  1. Segregate duties between billing, collections and the related daily postings.
  2. Review aged A/R schedules each month, paying particular attention to recurring past due accounts.
  3. Make sure the A/R detail schedule agrees with the general ledger at least monthly.
  4. Charge off, refunds and credits should be approved by management.
  5. Customer complaints should be followed up immediately.

INVENTORY

  1. Use surveillance equipment whenever possible.
  2. When a perpetual system is utilized, make spot checks frequently and complete counts as often as you can, but never less than annually.
  3. Check gross profit percentages monthly and reconcile material variances as they occur.
  4. Review the general ledger inventory and purchases accounts monthly for any unusual vendors.

ACCOUNTS PAYABLE

  1. Compile a list of all vendors including name, address and phone numbers.
  2. Update and review this list frequently for unfamiliar names, similar names or names with missing addresses or phone numbers.

CHECK SIGNING

  1. Limit this duty to management and use dual signatures if at all possible.
  2. Do not sign blank checks.
  3. Make sure all checks are accompanied by supporting documentation and mark the documentation upon check signing to prevent reuse.

JOURNAL ENTRIES

  1. Management should review and approve all general journal entries and supporting documentation.
  2. Pay particular attention to any large entries made at the close of an accounting period.

INCOMING MAIL

  1. When practical, incoming mail should come to a post office box and management should pick it up.
  2. Those employees who make deposits and handle receivable and revenue transactions should not be involved in this duty.

NUMERICAL SEQUENCE

  1. All company documents that result in a transaction should be numbered so that numerical sequence can be established and used as a control.
  2. Any break in numerical sequence should be investigated as it occurs.
  3. All Encounter Forms and/or Superbills should be accounted for on a regular basis by running a “missing ticket report.” Any lapses should be accounted for.
  4. Sign-in sheets should be maintained chronologically; these are a great aid for unraveling a fraud should the fraud occur.
  5. Likewise, always insist the front desk maintain cash receipt books in date and number order.

BONDING EMPLOYEES

  1. When fraud has been detected, the first question asked of the owner is usually “Are your employees bonded?” Sadly, the answer is usually “No.”
  2. Bonding those employees who are in a position to commit fraud is a frequently overlooked tool.
  3. Consult your insurance agent to discuss available employee dishonesty policies.
  4. The cost of this insurance is generally reasonable when compared to the other insurance coverage businesses incur.

While the steps listed above are not a cure all for the prevention or detection of fraud, if consistently applied, they will send a message to company personnel that the owner is minding the shop!


Mike Martin, CPAMichael M. Martin, CPA
Partner
Heard, McElroy & Vestal, LLC
(318) 807-3034
mmartin@hmvcpa.com

Mike has been involved in the accounting industry for 40 plus years. His primary focus is in taxation and audit services. Prior to joining Heard, McElroy & Vestal, Mike was partner at Monroe CPA firm Martin, Harrison and Smallwood. He became partner at Heard, McElroy & Vestal in December of 2009 when the two firms merged.

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