Vigilance on Fraud

Everyone thinks that fraud can’t happen to them. But fraud can happen to anyone, anywhere.

Fraud awareness and prevention is as important. Fraud prevention is a little like eating healthy; you eat fruits and vegetables, watch your portions, but…you eat a chip or two, or that donut, and at the time it seems harmless and it makes you feel good. But when you step on the scale a few weeks later, you want to quickly jump off.

The rationale I have heard from business owners and managers over the years are along the lines of, “this will slow us down” or, “I can’t afford to have someone do that”.

But the fact is that not having cash when you need it, or inventory to ship to customers will slow you down much more than implementing anti-fraud measures. For larger companies, financial reporting fraud can delay financial statements and put the company at risk for violating loan covenants or stock market exchange requirements.

Fraud is prevalent and is often perpetrated by the most trusted people in an organization. Fraud shares similarities with all crime – someone with the means, need, and opportunity, are in a position to defraud and embezzle. They can take advantage of those circumstances. Sometimes the person needs money for a family emergency, or gambling, or drugs. The reasons are as varied as there are people.

Financial reporting fraud can occur because of perceived undue pressure to “make the numbers.” Such deception will be unraveled, it is only a matter of time as the current period “borrows” results from future periods.

To get started, prioritize controls on your most valuable assets or complex processes. Some simple anti-fraud controls that can be put in place are often based on segregation of duties and documentation.

Segregation of duties is the concept that a person who has authorization over the use of assets (cash, inventory, machinery) should not also have custody of it.

A scenario would be: a person who approves bills must not have the ability to execute payments. This would put the person in a position to approve an invoice to a fake supplier and pay it. In larger enterprises, “top-side” entries, reporting adjustments that circumvent the normal record-to-report internal controls over financial reporting, can permit managers to manipulate results.

A good system of internal controls uses documentation to record the date, time, amount, and people involved. A simple example is warehouse personnel completing a packing list. If inventory is missing, accounting for the packing lists is invaluable in tracking when the problem occurred.

For financial reporting matters, a robust journal entry tracking and approval system is imperative to head off the reporting of falsified figures.

Revenue Recognition

Previously, I have written about the new revenue recognition rules that will take effect in 2017. This is right around the corner.

The standard requires retroactive application in the year of adoption. So depending on the number of years you use in your financial statements, this may affect revenue being recognized this year. Usually it is much easier and less costly to address a problem when information and people involved with the information are fresh.

Employees get promoted, leave, and retire, and their knowledge leaves with them. The present is when information is the most vivid and accurate.

Consequently, preparing now for the new standards will save you money and time.

The Financial Accounting Standards Board has created an implementation task force for ASC 606 because of the anticipated large number of systemic changes that a company may be required to implement to accommodate the standard.

 

SHAMROCK vCFO Services in Naperville, IL specializes in helping small and medium size businesses with strategy, taxes, accounting, and financial performance management. Steve Shamrock left big companies to help smaller ones energize the economy.