Accounting Procedures for Preventing Employee Theft and Fraud

During the course of our work with business owners, we often advise them on how to handle accounting functions within their businesses. One thing that can destroy a business is employee fraud or theft. The following are some ideas in developing a system to protect you, the business owner, from potential employee thefts and embezzlement and help establish sound accounting policies.

What do you think is the most important step to helping prevent employee theft?

Separation of duties is the key here. Many times the small size of a business' office staff limits the extent of separation of duties. Certain steps, however, can be taken to separate incompatible duties. The basic premise is that no one employee should have access to both physical assets and the related accounting records or to all phases of a transaction.

One of the most critical areas for separation of duties is cash. Generally, one person should not handle incoming checks, posting receipts to accounts, and receiving and reconciling the monthly bank statement. The result is the danger that intentional or unintentional errors could be made and not detected. An owner or another person not involved in the day-to-day bookkeeping activities should receive and review the bank statements and canceled checks before turning them over to the bookkeeper to prepare the bank reconciliations. The reconciliations should also be reviewed after they are prepared.

Today's banks often do not provide you with your cancelled checks. However, you can request that copies or facsimiles be provided. Many banks charge a fee for this service, but it is well worth the added expense. By obtaining these copies of the checks you are able to review them for any alterations, a sure clue that someone is embezzling from your business.

Also, a person who is not involved in the accounts receivable process should open the mail, prepare a list of the cash received, and prepare the deposit slip. Another person should be involved in actually taking the deposit to the bank.

How should I handle the accounts receivable function?

In the accounts receivable area, different people should handle preparation of monthly statements, receipts and investigation of customer complaints, and authorization of non-cash credits to customer accounts. At a minimum, the owner or designated personnel should review resolution of customer complaints and supporting documentation (on an occasional surprise basis, if not regularly) and approve all non-cash credits.

I own my own business. Should I review accounts receivable and see an aged accounts receivable report?

If a business bills customers for services or materials, a periodic aging analysis of client accounts receivable balances should be prepared. Review of such an analysis allows for prompt action on delinquent accounts. Collections on delinquent accounts are likely to be better the earlier collection efforts are started. (An article entitled " Accounts Receivable, King of Cash" would be valuable reading, related to this topic. Access this article by clicking the following link Accounts Receivable, King of Cash .) Also, you should review write offs of any receivables to be sure there are not any unusual or unexplained write offs. One method of theft is that an employee receives cash from a customer, pockets it and writes off the receivable.

Who should I have prepare disbursements? How should they be mailed?

In order to improve control over disbursements, the person who prepares the check to pay an invoice should not be signing the check. Once the checks are signed, they should be inserted into the envelopes and mailed by someone other than the person who prepared the checks. Invoices should accompany the checks, at the time of signing, for review by the owner or designated personnel. To reduce the risk of duplicate payment for purchases, payments should only be made from original invoices that are routinely canceled with the date they are paid. All duplicate invoices and documents not necessary for documentation of the transaction should be discarded during the payment process. A simple control is to mark invoices with a "paid" stamp or other indication of payment while they are in the custody of the check preparer or signer. The stamp should provide for notation of the check number and the date and initials of the person who checked the invoice or signs the check.

f someone other than the owner approves invoices, that person should initial the invoice to indicate it is okay to pay. Such a procedure serves as a reminder to the bill processor of steps to be performed, indicates to the check signer that those steps were done, and helps prevent against misuse or repayment of the invoice while adding very little time to the bill-paying process.

If I have an employee leave what should I do to help train a new employee?

Many businesses do not have an accounting procedures manual. The owners often assume that because the business' accounting system is "relatively simple" and accounting personnel have direct and easy access to the owner, that there is no need for a manual. However, written procedures, instructions, and assignments of duties will prevent or reduce misunderstandings, errors, inefficient or wasted effort, duplicated or omitted procedures, and other situations that can result in inaccurate or untimely accounting records. A well-devised accounting manual can also help to ensure all similar transactions are treated consistently, that accounting principles used are proper, and records are produced in the form desired by management.

A good accounting manual should aid in the training of new employees and possibly allow for delegation to other employees of some accounting functions management performs. It takes some time and effort to develop a manual. However, this time is offset by time saved later in training and supervising accounting personnel. During the process of a comprehensive review of existing accounting procedures, for the purpose of developing the manual, management often discovers procedures that can be eliminated or improved to make the system more efficient and effective, and discover possible internal control problems.

When should records be destroyed?

A written records retention policy should be developed that accommodates legal requirements, anticipated needs for historical information, and available storage space. Click the following link for a retention listing guide pertaining to your specific need:

Personal Records Retention Guide

Business Records Retention Guide

What type of monthly reporting should I use?

Many businesses tend to run their books on a cash basis. If your business is strictly a cash only business, this type of accounting makes sense. However, most businesses may have customer accounts to maintain and do not always pay their bills the moment they receive them. These types of businesses may want to consider using the accrual basis of accounting. (You can still use the cash method for the business' tax returns.)

The purpose of the accrual method of accounting is to accurately measure the actual earnings of a business, rather than simply reflect its cash flow. The accrual method reports income in the period in which it is earned, without regard for when the payment is received. Expenses are matched to the period for which they apply, without regard for when the expenses are paid. Income is reported when both, (1) all events have occurred that fix the right to receive the income, and (2) the amount can be determined with reasonable accuracy. Expenses are deducted or capitalized with both (1) the business becomes liable for the expense, and (2) economic performance occurs. Economic performance occurs at the time when property or a service is provided or used.

Many third party users prefer financial statements using the generally accepted accounting principle's (GAAP) accrual basis of accounting. Third party users are often financial institutions where financing is being sought. GAAP, in most cases, reflects economic reality. GAAP are the principles that CPA's and other accounting professionals use to prepare financial statements for business concerns. If you are considering changing to accrual from cash, I recommend getting professional guidance.

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