When the Cat's Away: Why Separating Accounting Tasks Matters

Summer is in full swing, and like everyone else, business owners want to take advantage of the seasonal opportunity to slip away for some much needed R&R. If you're one of the fortunate few, your business is in a place where you can partially, or even completely, unplug and trust that business will carry on as usual. Of course, getting to this point takes time, trust, and lots of strategic planning. While your temporary concern is making due with a skeleton crew holding down the fort, the bigger focus should be ensuring more than one person is watching your loot. Without proper separation of duties, whether you're in the office or on the beach, your company is at risk for employee theft.

Whether you have two, ten or 100 employees, every business is vulnerable to fraud if proper separation of duties does not exist among the various accounting functions. Preventing business fraud isn't as simple as separating accounts payable from accounts receivable, but rather it’s about separating authorization and record keeping from account reconciliation. Fraud occurs in the accounts receivable role when a single employee has control over or access to billing, receiving payments (collections) and writing off balances. And within accounts payable, businesses risk getting ripped off when the same employee is entering the bills, creating checks and reconciling the bank account.

Here’s How Employees Get Away With Fraud:

• Skimming – instead of applying a payment to the accounts receivable balance, an employee steals funds from a customer, creates a bad debt or credit memo and then applies it to the A/R balance. This way the customer doesn't look to be past due, but the actual money is still missing from the account.
• Check Tampering – an employee intercepts, forges, or alters a check drawn on the business account. You can reduce your risk for this type of fraud by separating the check cutting and preparation duties from the person in charge of signing the checks.
• Billing Fraud - an employee submits personal, padded, or completely fake invoices for goods or services to the employer. Some employees will even go so far as to submit invoices to fictitious companies they have created.
• Payroll Fraud - an employee inflates hours or overtime on their time sheets, or an employee with payroll access manipulates wages or issues payments to ghost employees.

Here's How To Gauge Your Current Risk For Fraud:

• Is the person writing your checks also reconciling your bank account?
• Do you have enough accounting staff to create consistent separation of duties to protect against fraud?
• Do you have cash coming directly into your business?
• Are you personally opening the bank statements and reviewing each check for authorized payee, signature, and approved electronic payments before handing them over to the bookkeeper?
• Are you closing out prior periods to prevent hiding fraudulent transactions in previous periods?
• Do employees understand what constitutes fraud and believe they can speak freely to report it?

Small to medium sized businesses are more susceptible to fraud, and understandably, more sensitive to the financial loss. For growing businesses that are concerned about fraud but don't have the ability or the desire to hire on additional staff, GrowthForce helps by supplying a dedicated service team to develop disciplined processes and procedures for performing the daily, weekly and monthly tasks for each client. That means the person writing the checks is no longer reconciling the bank account. It also protects the business by ensuring more than one pair of eyes is monitoring the books and reviewing the financial statements for any type of discrepancy – whether it’s due to theft or human error.

Interested in learning more about small business fraud prevention? Download our free whitepaper Outsmart Business Fraud With Internal Controls.