Year end � Time to Tighten Internal Control and Prevent Fraud

by Susan M. Wolcott, CPA, CFE (Certified Fraud Examiner)

Year end is a busy time in most businesses. Tax planning so that tax burdens can be evaluated and strategies developed to kept taxes as low as possible, determine if bonuses can be paid and how much, evaluate whether fixed assets should be purchased now or delayed into the future and many other decisions. It is a time to look at use of money and future financial needs of the organization.

As you assess the results of operations consider whether or not the results are what you expect? Could your money be going to an unplanned place? Fraudsters. Year end is a prime time to review your operations for ways that unscrupulous employees or external criminals might be able to exploit weaknesses in your internal controls and steal your hard earned dollars.

Don�t be in denial about the potential for fraud because of personal feelings. While trust is a keystone in relationships, verification supports that the trust is warranted. Many small business employees are long time friends or family members, no one wants to think a friend or family member might steal from them. But, there are circumstances that can drive even the most honest person to commit fraud. Having strong internal controls in places and tested regularly for effectiveness reduces the opportunity for fraud, can discourage employees who might be tempted to steal, and supports trust with verification.

General guidelines for your year end fraud review:

Hire a professional. Don�t undertake a year end fraud review alone. Together, you can examine some of the key areas of your company to look for wrong doing. The professional can conduct a fraud risk assessment and make recommendations for implementing or strengthening internal controls. If you already have strong internal controls test those controls for effectiveness and for ways to tighten controls. When suspicions of wrong doing arise it is time to consider a forensic audit.

Check the paper trail. Review bookkeeping records, invoices, bank statements, payments, journal entries, financial records with an eye toward identifying doctored, forged or missing documents. Your books are a major information source. Be wary of an unusual number of journal entries posted near the end of any accounting period. They could be adjustments made to cover theft or misappropriations.

Look under the rocks. Accounts receivable and payable should have a thorough review. When customer payments are misappropriated, fraudsters may adjust receivable to cover the shortage. Adjustments to payables may signal phony billing schemes.

Follow the money. When bank reconciliations and bank statements are examined, some questions to keep in mind. Are checks being written for petty cash more frequently than expected? Are there non-payroll checks being written to employees? If so, do they have a legitimate purpose? Who has authority to use company credit cards? Are credit cards purchases reviewed for legitimate business purpose?

When suspicions arise dig deeper. Fraud schemes often involve more than one person and can be committed by people outside the company or by a combination of employees and outsiders.

Think again. If no suspicions arise consider whether you have adequate controls or have been lucky that weaknesses have not been exploited. A control that may have been effective two years ago or that was appropriate for one job may not meet your organization�s changing needs or address the risks associated with other activities.

Basic steps to take to reduce the risk of fraud:

While these red flags may indicate identity theft, there may be legitimate reasons for the above listed events so make sure to follow up and resolve any issues. Protect yourself.

How to protect your information and minimize your risk of identity theft:

1. Eliminate opportunity: A business creates the opportunity when it does not have basic checks and balances in place. Make sure you have at least rudimentary controls in place; you might be surprised at how many businesses don�t.

2. Maintain oversight: Use your financial statements as an early warning system for fraud. Know how to read your financial statements and what signs of fraud look like.

3. Lead by example: Model the ethical, honest behavior you want from others. A boss that skims cash, underreports income, or engages in other questionable business tactics makes it easy for employees to rationalize committing fraud.

4. Be careful in hiring: Interview carefully, check references and conduct background checks.

5. Be approachable: Make sure your employees feel appreciated for their contribution to the business and feel like they can talk to you if they have a problem.

6. State the obvious: Have a written policy that fraud is unacceptable. Everyone in the company has a vested interest in preventing fraud. Educate employees about fraud, the effect it has on business and them. Have a procedure that helps employees feel comfortable reporting suspicions of fraud.

We at Kosmatka Donnelly & Co have a fraud team that can assist you with fraud risk assessment, help establish or improve controls, perform a forensic audit, and/or provide litigation support. Contact us if we can provide any of these services to you.