Employee Fraud, Accounts Payable, Double-Entry Bookkeeping and the Father of Accounting

Recently someone asked me why accountants use “two-sided” entries? It really is simple, but it requires some history. When Luca Pacioli, “The Father of Accounting,” wrote his foundational book on double-entry bookkeeping 5 centuries ago, his theory was that these “balanced” transactions would serve as a proof of accuracy. We call this debits and credits within the accounting equation, assets = liabilities + equity. The accounting equation serves as a kind of error-detection system: if, at any point, the sum of debits does not equal the corresponding sum of credits, then an error has occurred.

This is important when it comes to occupational fraud and misappropriation of assets. According to the Association of Certified Fraud Examiners, most frauds were committed by the accounting department or upper management and one of the most common is Accounts Payable schemes.
 
Accounts Payable fraud can often times provide an employee with a way to hide illegitimate transactions among thousands of legitimate ones. The more transactions there are, the lower the probability of an employer finding illegitimate transactions among them. As with other departments, tight controls (including enforceable policies and procedures) need to be present within an accounting department.
 
Without these controls, employers sometimes find their most “honest and loyal” employees giving in to the temptation to “borrow” from the company’s assets due to their personal lives or their loved ones’ personal lives falling on difficult times.
 
An employer can keep their honest and loyal employees honest and loyal and minimize rogue employees setting out to steal money from the company by:
 
·         Understanding the built-in security in your accounting system’s accounts payable module. This security usually would prevent accounts payable fraud but isn’t used because proper segregation of duties isn’t present and/or management laziness.
·         Developing enforceable internal control policies and procedures and providing them regularly to accounts payable employees.
·         Reviewing and rewriting each accounts payable employee’s job description to ensure proper segregation of duties are in effect.
·         Using a third-party data mining tool to help you analyze your accounts payable transactions on a regular basis. 
·         Having an annual review of your accounts payable function done by an internal control expert.
 
Your company’s policies and procedures aren’t worth the paper or hard drive space they’re written on if they’re not known, not enforced, and don’t carry consequences for employees. These policies and procedures can be one of your biggest assets in making your accounts payable function more securely and accurately. Some fraud prevention ideas are:
 
  • Examine suspicious transactions including, but not limited to, weekend, evening, and holiday transactions. This can be done routinely and easily via a data mining tool.  A fraudster will regularly use off hours to perform their dirty work.
  • Keep a careful eye on any unusual general ledger accounts to which your accounts payable system is posting.  Usually fraud can be present when the offsetting entry for a customer payment is going against another account other then decreasing accounts receivable.
  • Management should perform random checks on purchases. Did you receive everything you ordered? Is the employee taking the product home with them or is there some kind of kickback? Your policies and procedures should prevent this unless collusion between employees is present. In that case, random checks by management will help catch or deter the fraud.
 
The majority of fraud can be prevented with the right controls in place. Business owners owe it to themselves, their company and their employees to take the risk of fraud seriously. The cost of prevention is usually a fraction of the loss that is possible if the fraud was not prevented.

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by Scott Heintzelman - Scott is a CPA, CMA and CFE living in Pennsylvania. Scott is a partner serving on the executive team at McKonly & Asbury LLP, a regional accounting firm with multiple offices in the Mid-Atlantic. The firm has been an IPA ALL-STAR as well as winning Best Places to Work in Pennsylvania for numerous years.

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