| Can using QuickBooks accounting
software help prevent fraud in your small business? It can,
if you establish and maintain boundaries in your accounting
practices, your employee guidelines and in the software itself.
QuickBooks is the preferred accounting software program
for small to medium-sized businesses. Yet often companies
are attracted to the software’s user-friendly features
precisely because management lacks a thorough understanding
of accounting — a situation ripe for fraud.
Small businesses are most vulnerable to occupational fraud
and abuse. According to the Association of Certified Fraud
Examiners’ (ACFE) 2002 Report
to the Nation, the average small business fraud incident
causes $127,500 in losses, while the average corporate or
enterprise fraud occurrence costs $97,000. An estimated
six percent of revenues are lost as a result of occupational
fraud and abuse.
Applied to the U.S. Gross Domestic Product,
this translates to losses of approximately $600 billion,
or about $4,500 per employee. Can your company afford this?
Setting the Stage for
Fraud
Let’s first examine how fraud occurs. Business owners
rely upon their bookkeepers or administrative staff to input
and account for their companies’ finances. Employees
are hired for their knowledge of QuickBooks and accounting,
often because the owners lack such knowledge themselves.
When this situation occurs, the door is opened for fraud.
Bookkeeping or accounting employees who discover vulnerabilities
and a lack of internal controls can find ways to easily
commit fraud without the knowledge of the owner. And the
illegal activity can drag on for months, even years. The
average fraud scheme usually goes undetected for 18 months
before it is discovered, according to the ACFE report.
If you envision these fraudulent employees
as hardened career criminals, think again. The typical occupational
fraud perpetrator is a first-time offender; only seven percent
of perpetrators have prior convictions for fraud-related
offenses. Employees most commonly commit fraud to accommodate
living beyond their means, resolve financial hardships,
or satisfy the conviction that the money is "owed them"
for perceived wrongs in the workplace.
Preventing Fraud
Now we understand how fraud occurs in the small business
environment. But how can you deter fraud in your company?
First, consider outsourcing your accounting. An outside
bookkeeping and accounting company separates accounting
functions, providing needed checks and balances. But if
you still want to keep your accounting functions in house,
follow these four steps:
1. When interviewing potential accounting or bookkeeping
employees, carefully screen your candidates. Background
checks are vital.
2. Once you’ve hired new employees, have them sign
a confidentiality agreement and provide them with an employee
handbook, along with detailed accounting policies and procedures.
One of the biggest deterrents to fraud is the perception
that management has its house in order.
3. Strictly follow accounting policies and procedures at
all times — no exceptions. Over 80 percent of occupational
fraud involves asset misappropriations, and cash is the
targeted asset 90 percent of the time.
4. The simplest fraud deterrent involves the
division of accounting functions between multiple employees:
• Do not have the same person
open the mail, prepare deposits, take the deposits to the
bank, enter receipts into the accounting system and reconcile
the bank statements.
|
 |
• Do not have
the same person approve accounts payable, enter expenditures
into the accounting system, cut the checks, sign the checks
and mail the checks.
• Do not have the same person
call in or prepare payroll, enter payroll into the accounting
system and distribute the payroll.
In small companies, these four steps may
seem difficult to accomplish because of the limited number
of employees and a natural tendency to rely solely upon
one individual for financial functions. Yet it is vital
for owners to either outsource their accounting or strictly
oversee their employees and know how to deter and detect
fraud.
Sniffing Out Fraud
How do you detect fraud? Most owners become aware of fraud
either through tips from employees, customers, vendors or
anonymous sources, or — the second most common method
of discovery — by accident. But you don’t have
to leave the detection of fraud in your business to chance.
With a basic knowledge of QuickBooks settings, you can control
what can be done with your money.
Each QuickBooks version has a multi-user
feature. Even if you own just one copy of QuickBooks, you
can set up more than one user with different user rights
and preferences. As the owner, you should designate yourself
as the administrator and keep a private password. The administrator
is the only user who can set up and modify additional users,
set certain preferences by user, select a closing date,
and authorize changes.
One fraud deterrent function in QuickBooks
is the "audit trail" feature. When any user changes
or deletes a transaction, the audit trail feature records
those transaction changes or deletions. This information
can be retrieved through an audit trail report, which shows
the original transaction, the new transaction or the deleted
transaction. The report also shows the original date on
which the transaction was recorded, as well as the user,
date and time that the change or deletion occurred. You
may notice that you get slower performance from QuickBooks
with this feature turned on, but the benefits clearly outweigh
the slower performance.
Another method for detecting fraud can be
found in the QuickBooks Pro Accountants 2003 version or
higher. If a cleared bank item has been altered, the action
will show up in a "reconciliation discrepancy report."
The report displays all bank account transactions that have
been changed since the last time the account was reconciled.
Another helpful function is the "missing checks report."
This report displays any missing check numbers or duplicate
check numbers within your bank accounts. These reports can
assist in determining any tampering with the books.
Another important step to take — which
you likely already know — is to back up your QuickBooks
files and keep your back-ups off-site. If fraud is suspected,
you can restore old back-ups to see the original entries.
Small business owners are incredibly busy
running their operations. That’s why it can be so tempting
to place financial responsibilities elsewhere. But you’ve
worked hard to build your company and earn your profits.
It’s worth spending a little extra time to educate
yourself about fraud, accounting and QuickBooks. Be aware
of what to look to for, and have accounting policies and
procedures in place. To really protect your business, enlist
the aid of a competent auditor, CPA or Certified Fraud Examiner
to assist you so that you can concentrate on what you do
best: selling your products or services. With the ideas
presented here, you can safeguard your company against occupational
fraud.
|
