Protect Yourself from Accounting Fraud

Stealing from kids is pretty high on the list of vile crimes, but that's essentially what a 68-year-old accountant has been accused of. Last week, a California state judge imposed a 24-year sentence on Marion Ledford for embezzling almost $1.8 million from a non-profit organization that provides scholarships to high-school kids headed to college. The two-dozen-year imprisonment will have to wait though:  Mr. Ledford first needs to finish the 18-month term he received a few months ago when he pled guilty to tax evasion. As shocking as the story is, considering the trust we give to accountants and bookkeepers, maybe the real surprise is that it doesn't happen more often. 

In order to prepare your taxes and other financial documents, you provide your accountant with access to all of your financial information.  Though most deserve the trust that this represents, it is also true that some don't – and it's nearly impossible to intuit which category a person falls into. Among the most frequently seen fraudulent practices used to cheat clients are billing fraud, theft of cash and/or stock, fraudulent payroll practices, and expense fraud.

Even if you're a small business and don't have millions at risk the way that Mr. Ledford's employers did, owners and managers need to take responsibility for protecting themselves from accounting fraud. Simple steps that implement internal controls can generally avoid a disappointing and costly surprise down the road. They include:

• Divide accounting responsibilities. Though it may be simpler to assign all of your accounting tasks to a single individual, when you split up responsibilities you provide yourself with a built-in fraud detector. Having one person prepare your tax returns and another your financial documents will not only make embezzlement more difficult but will also reveal disparities.
• Restrict access to only what is necessary for your bookkeeper's and accountant's assigned duties. If an individual does not need access to computers, cash, data, or inventory, there is no need to provide it.
• Insist upon a paper trail and impose standard procedures that are required of everybody.
• Conduct regular audits of your accounts and your stocks. These should be done by an individual other than the person regularly tasked with the function.
• Review payroll on a regular basis. Overpayment and the creation of false employees who receive payments is a surprisingly common method of stealing money. Compare actual employee records to payments going out.
• Impose strict controls on how expenses are managed and reimbursed, and create alerts for all credit card charges made on business cards.
• Project cash flow to establish a level of control and spot unexpected levels of monies going out. 

It is disappointing that this level of control needs to be exerted over employees that should be among the most trustworthy in your organization, but preventing fraud from taking place is much less trouble than pursuing it after it has happened. 

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All Articles by Frank Jenkins Jr