Fraud is not a crime that occurs out in the open, and occasional internal or external audits are no longer enough to detect fraud within an accounting system. To best prevent fraud, a company should be aware of all the types of fraud that could take place so it can create appropriate audit programs. A company should discuss the risk of fraud with all management and staff, use fraud tests and be aware of the managing staff's ability to override fraud control systems. Unusual transactions, or "red flags," in an accounting system are generally the first clue of fraudulent behaviours within a company.
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Notice cash and investment thefts in the form of skimming or larceny. According to website Accounting Financial Taxation, fraud in the form of cash and investment theft are often the most publicised, but result in the smallest amounts of money stolen when compared to other forms of fraud. Skimming happens when an employee takes money, usually a little at a time, before it is recorded into the accounting system, or falsifies receipts and bank deposits. Larceny happens when an employee takes money after it was recorded into the accounting system, tampers with checks or is involved with deceptive vendor schemes. Accountant Joel B. Charkatz, in an article for Lorman Education Services, states that book-keepers and those with access to a company's financial records are usually the individuals found guilty of this type of fraud. You may detect this form of fraud if you notice small amounts of money missing periodically.
Look for discrepancies in employee expense accounts. An employee committing fraud may turn in fake receipts and claim them as a business expense, ask for reimbursement for items not approved, inflate the cost of a purchase if receipts are not required or ask for reimbursement more than once for the same expense. Other ways an employee may steal money from a company include not paying back advances or using company credit cards for personal use. In a large company, expense account discrepancies as a result of fraud may look small, but can build to large amounts with time. To detect fraud in employee expense accounts, require receipts with all reimbursement requests and establish controls that require detailed records of all purchases.
Find the intentional falsification of financial records with internal audits. Misrepresenting financial reports is still fraud, even if assets were not stolen, because the information misleads investors and affects the price of a company's stock. Accounting Financial Taxation recommends employing the use of external auditors to conduct full audits in addition to internal audits.
Detect supplier kickbacks or fraudulent payments by noticing unusually high purchase prices or an unknown vendor. Employees in charge of making company purchases may ask suppliers for a kickback payment for doing business together, which results in a business paying more than usual for goods. A company can detect this type of fraud by knowing the market value of supplies it purchases compared to the price it paid.
Alternatively, a company may make payments to vendors or employees that do not exist. Charkatz states this type of fraud is harder to detect in large businesses that employ hundreds of people and contract with several vendors. However, checking purchase orders and payment requests against a current roster of employed individuals and contracted vendors can help detect and prevent fraud in an accounting system.
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- "Journal of College Teaching & Learning"; New Frontiers: Training Forensic Accountants within the Accounting Program; Vinita Ramaswamy; Sept. 2007
- Accounting Financial Taxation; Basic Control Systems and Types of Fraud; September 2008
- Lorman Education Services; Fraud in the Workplace; Joel B. Charkatz; January 2007
- Keller & Owens, LLC: Preventing and Detecting Fraud in Not-for-Profit Organizations