Time to Act Now: Ways to Detect and Prevent Accounting Fraud

Time to Act Now: Ways to Detect and Prevent Accounting Fraud

Accounting fraud is one of the most common form of employee fraud which involves the unauthorized use of financial data in order to steal money from the company. This scheme, considered as one of the industry’s worst form of corporate scandal, can happen to any businesses and involves financial losses and severe liabilities to organizations worldwide. In this article, we will discuss everything you need to know about accounting fraud including tips on how to detect and prevent it from happening.


Fraud Gracing the Headlines

One of the most recent headlines in the Philippines regarding this crime happened last July 25, when the Department of Justice (DOJ) sends an accountant to prison after being charged of embezzling over P3.7M from three different corporations, thus violating Republic Act 9160 or the Anti-Money Laundering Act.

The accountant was tasked to prepare the Value-Added Tax (VAT) returns due, as well as other corresponding tax payments for the three corporations, and further intel stated that the accountant was accused of “making false and fictitious VAT returns and preparing checks in excess of the actual amount due to the BIR and pocketed the rest of the monies xxx.”.

This is may just be one of many incidents, reported or unreported, of accounting fraud.

A Closer Look At Accounting Fraud

The first thing that you should do to protect your accounts from unexpected liabilities is to know what the crime is all about, and identify its types.

Accounting fraud is the term used for one’s misconduct of intentionally controlling the accounts payable and receivable resulting to misstatement of financial balances of a company.

Let’s take a look at some of the most common types of accounting fraud:

  • Embezzlement – often called as “larceny”, embezzlement is an accounting fraud which often happens to SME’s and medium enterprises, in which the staff, due to lack of internal controls, was able to steal money without the company’s knowing.
  • Accounts Payable Schemes – Using company budget to pay for personal purchases, or setting up a fraudulent supplier which will bill the company.
  • Accounts Receivable Fraud – Best examples are “red flag” accounts and sales. Other notable mentions are diversion of revenues to an untracked account and lapping.
  • Other examples like using the long estimate of useful life for assets resulting in larger than usual profits, double check fraud (writing a check to supplier then writing another check for himself/herself, then recording it as a transaction with the same supplier), and many more.

Tips on Preventing Accounting Fraud

Employee background checks is not enough to safeguard your company from such malicious acts. Proper management and appropriate internal controls are also key players in defending your books from these fraudulent activities.

Below are some guidelines that can prevent you from becoming a victim of accounting fraud:

1. Know Your Books

Accounting fraud often happens to financials that are not being monitored. Make sure to review your books on a regular basis.

2. Validate Your Expenses

Make sure that incoming checks are being endorsed to you (as the owner) and are personally signed (especially the ones for payroll) by you.

Also, it’s best to do proper validations of checks for their integrity:

  • Supplier checks
  • Checks from unknown individuals
  • Any missing checks, out of order check numbers etc.
  • Checks in which amounts are larger than your standard amount for petty cash
  • If payee in check doesn’t match in the names of your registry (contact list)

3. Protect Your Data

Remember to apply the basic guidelines when it comes to protecting your data such as giving accounting software access to authorized parties only and making sure passwords are always secure.

4. Double Check Transactions

Getting familiarized with your bookkeeping software and enlisting third party as check-and-balance mechanism help in making sure your financials is sound and stable.

Crimes like accounting fraud can happen to any business, and if you’re too careless you might just invite trouble at your company’s doorstep. Don’t play victim–take precautionary measures in protecting and securing your business from potential frauds today!