How to Prevent Fraud in Accounting?

Fraud is an ugly word, and it conjures up all sorts of negative images. Unfortunately, it is an all too common occurrence in the accounting world. In fact, a study by the Association of Certified Fraud Examiners found that organizations lose 5% of their revenues to fraud each year. (1) That’s a staggering number!

What are some of the most common fraud issues in accounting?

Like most other departments, accounting is susceptible to various fraud schemes. The most common issues include:

Theft of cash or inventory

Employees can steal cash by taking money from the till or submitting fake invoices. They can also steal inventory by taking items home or shipping them to a fictitious company.

Credit card fraud

Employees can use company credit cards for personal expenses or purchase items for resale.

Fudging the books

This is probably the most common type of accounting fraud. It involves falsifying financial records to make it look like the company is doing better. This can include inflating revenues, understating expenses, or creating fictitious entries.

Financial statement fraud

This type of fraud occurs when false or misleading information is included in financial statements to deceive investors or stakeholders. This might include overstating assets, understating liabilities, or omitting important information.

Embezzlement

Embezzling is a type of fraud that occurs when an employee steals money or assets from their employer. This can be done by tampering with accounting records or stealing cash or inventory.

Fraudulent invoices & fake invoices

One standard scheme is to create fake invoices to siphon money away from the company. The perpetrator will often make a dummy company and then bill the victim company for counterfeit services or products. This can be a complex scheme to detect, as the invoices will appear legitimate.

Bribery or kickbacks

Some employees may attempt to receive kickbacks or bribes from awarding contracts or business to specific companies. This can be done by either paying someone off directly or inflating the prices of goods or services to receive a larger commission.

Fraudulent billing or expense reporting

This involves submitting false invoices or expense reports to get reimbursed for unauthorized expenses. Employees may also falsify records to cover up their tracks.

These are just a few of the most common accounting fraud schemes. Each of these scams can result in significant losses for businesses.

How can you prevent fraud from happening in your accounting department?

You can take several steps to help reduce the risk of fraud in your organization. Here are some tips:

Establish strong controls

Implementing adequate controls is one of the best ways to prevent fraud from happening in the first place. Controls can include segregation of duties, dual authorization for transactions, and proper documentation requirements.

As such, it becomes more difficult for employees to commit fraud. Implementing strong controls also helps to detect fraud when it does occur.

Train employees on fraud prevention

Employees need to be aware of the signs of fraud and prevent it from happening. They should be trained on the company’s controls and report any suspicious activity.

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Remember, an accounting firm is only as good as its weakest link. By implementing these prevention measures, you can help strengthen your organization’s overall security.

Regularly review financial statements

Financial statements should be reviewed regularly to ensure accuracy and freedom of fraud. This can help to identify any irregularities or discrepancies.

Rather than wait until after the fact, taking these proactive steps can help to reduce the risk of fraud in your accounting department. By being vigilant and implementing solid controls, you can help protect your business from this costly crime.

Restrict user rights

How many people have access to your accounting systems? Are all of those people authorized to view and edit financial data? Restricting user rights is another way to help reduce the risk of fraud.

It is essential to limit access to only those who need it. This helps to prevent unauthorized individuals from viewing or manipulating financial data.

Closing financial years in due time

Avoid leaving your financial data open and exposed for too long. Closing your financial years promptly can help to reduce the risk of fraud.

When data is left open, unscrupulous individuals can easily manipulate it. By closing your books regularly, you can help to protect your data from potential abuse.

Digitalization

Why deal with paperwork when you can go digital? Digitalizing your accounting processes can help to reduce the risk of fraud. It is much easier to track and monitor transactions when everything is done electronically. This makes it more difficult for employees to commit fraud.

Going paperless also helps to improve efficiency and accuracy in your accounting department.

Get an extra pair of eyes

Auditors recommend that businesses get an extra pair of eyes to help monitor their accounting processes. By having a third-party review your financial data, you can help to identify any potential fraud schemes.

An auditor can provide an objective view of your financial statements and identify discrepancies or irregularities. This can help you address any potential issues before they become more significant problems.

Segregate duties

Having specific people responsible for different tasks can help to reduce the risk of fraud. When duties are segregated, it is more difficult for employees to commit fraud.

For example, you may want to have someone responsible for recording transactions, someone responsible for verifying transactions, and someone responsible for reconciling accounts. This helps ensure that each step in the accounting process is executed correctly and monitored.

Take time to know your business partners

People are built differently. What might be a red flag for one person might not be for another. This is why it is important to take the time to get to know your business partners.

Though it might be hard to know the true intentions of someone, it is always better to be safe than sorry. By being aware of the risks associated with doing business with specific individuals, you can help to protect your organization from potential fraud.

By taking these proactive measures, you can help to reduce the risk of fraud in your accounting department. By being vigilant and implementing solid controls, you can help protect your business from this costly crime.

How tech can help curb fraud in the accounting department?

While technology can never completely eradicate fraud, it can play a significant role in helping to identify and deter schemes from happening.

Anti-Fraud Software

One way that businesses are using technology to fight fraud is through anti-fraud software. This software can help monitor and track financial data, identify irregularities, and flag potential fraud.

The anti-fraud detects in real-time so that companies can investigate and prevent losses. By using this software, businesses can help to safeguard their financial data from being manipulated.

User Behavior Analytics

Another way that businesses are using technology to fight fraud is through user behaviour analytics. This type of software analyzes a user’s activities on the network to identify suspicious behaviour.

Behaviour analytics can help to identify activities such as data tampering, unauthorized access, and financial fraud. By using this software, businesses can help to protect their networks from being compromised.

Going Paperless

Another way that businesses are using technology is by going paperless. It is much easier to track and monitor transactions when everything is done electronically. Users are monitored through audit logs, helping to keep track of what actions are being taken on the system.

For instance, Envoice reduces the need to use paper invoices and receipts, which can easily be misplaced or altered. It is much harder for things to fall through the cracks with everything being done electronically.

The software’s smart scan technology captures all the relevant information from an invoice or receipt, including the amount, VAT, and other taxes, product, and service codes, and enters it into the accounting system. This helps to speed up the invoicing process and reduce the risk of fraud.

Use of Digital Signature

Additionally, businesses are using digital signatures to help authenticate transactions. This can help reduce the chances of someone faking or altering a document.

It is much harder for someone to forge or alter a document by tying a digital signature to a specific individual. This can help to improve the integrity of financial data and transactions.

Parting shot

Businesses are starting to see the importance of technology in preventing and combating fraud. While technology can never completely eradicate fraud, it can play a big role in helping to identify and prevent schemes from happening.

By using technology, businesses can help to safeguard their financial data and operations. This is why software like Envoice is important – it helps reduce the risk of fraud and protects your business.

Try Envoice today to find out more about how our software can help to reduce the risk of fraud in your accounting department.

Article Sources:

1- https://www.acfe.com