Separating accounting duties is key for preventing fraud

Segregation is a good thing – when it separates business functions to help avoid fraud. Many of the biggest problems companies face result from too few people having too much control over what is done – or reported – with money. This holds true regardless of a business’s size. No one knows better than Japanese giant Toshiba, which has lines of business in nuclear reactors, computers, and agribusiness, to name just a few.

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About a year ago accounting scandals came to a head at Toshiba, rocking Japan and sending tremors through associated businesses worldwide. Executives had the option of properly using internal controls to protect the value and reputation of the company or make short-term decisions based on profit expediency. They apparently chose the latter, to devastating effect. For example: "Toshiba accounting scandal highlights issues in corporate governance," reported by nippon.com:

“At Toshiba, executives put top priority on the financial results for the current accounting period, placing severe pressure on subordinates to improve the figures for their business units. Faced with no alternative but to bend to executive demands, those lower down in the company turned to cooking the books… a major contributing factor cited in the investigation committee’s report was a ‘corporate culture where employees cannot act contrary to the intent of superiors.”

In short, don’t tell the truth; tell the truth as the bosses want it told.

Small businesses and other organizations take it on the chin as well. How often have we seen or read reports of a business’s trusted bookkeeper being convicted of having stolen from the company, or of a Little League or church treasurer making off with the league’s or congregation’s money? Plenty of times. That’s why accounting and money-handling tasks should be divided among individuals or departments, with strict procedures in place to ensure oversight and accountability.

(Another important safety tip:  as the importance of information technology has grown to the point where it is indispensable for most businesses, it’s worthwhile to have similar division of responsibility and accountability within the IT department or operation.  An IT person with sole operational oversight of that business function in effect has potentially sole control over what, how, and in what manner, your financial information is used or misused).

On business fraud generally, the Association of Certified Fraud Examiners gives businesses a good overview of where the greatest problems lie:

“The five most common fraud schemes for organizations with fewer than 100 employees in the ACFE report were: billing fraud, corruption, check tampering, skimming and expense reimbursement fraud. Corruption schemes deal with crimes such as bribery, illegal gratuities and kickback arrangements. The largest number of perpetrators in the entire study, 41.5 percent, had been with the organization between one and five years, most of them had a college degree and worked in the accounting area.

Recognize that any one person, regardless of time with the company or relationship (even family members) can either be tempted to commit fraud or will do it with intent aforethought. Therefore, separate duties by function, not by person. Temptation is abetted by secrecy.

  • For each essential accounting role in your business have separate departments or individuals responsible for each task. Resist consolidation of accounting and reporting functions for the sake of streamlining or “efficiency.”
  • Individuals or departments that receive cash or other forms of payment should not also be in a disbursement role.
  • Divide cash handling authority and accountability as much as possible within the bounds of effective operations.
  • Employees with authority over accounts payable should not be responsible for reconciling bank statements.
  • Employees who reconcile financial reports and data should not prepare financial statements.
  • Conduct random reviews of financial activities often enough for everyone to know you’re paying attention.

The American Institute of Certified Public Accountants has multiple resources to guide segregation of duties. One provides resources on internal control and the other is titled Understanding the Entity and it's Environment

Fraud doesn’t just affect that guy you read about in the newspaper: it could be you.

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Tagged Accounting, Fraud, Fraud Prevention