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Accounting Fraud: Prevalence and Prevention

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Jun 9th 2015
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Much like the prevalence of data breaches, accounting fraud is on the rise, it can happen to anyone, and – as with data security – it usually is caused by human error and is easily preventable.

When it comes to accounting fraud to quote an overused phrase, “you don’t know what you don’t know,” especially if you don’t know what you are even looking for, according to Dawn Brolin, CPA and Certified Advanced QuickBooks ProAdvisor.

She regularly works with firms and businesses to advise them on accounting fraud prevention. What Brolin sees on a regular basis are some of the most easily preventable yet often ignored activities and even small firm practitioners need to become investigators, as well as advisors.

“The most common thing I see is when someone tells you numbers with nothing to back it up, typically entries into an accounting system that are simply not true,” says Brolin. “If we are not the direct bookkeeper, you have to ask are you looking at the bank statement, are you sure those are those bills? Often the ones doing the write-up (at businesses) are driving the ship and that’s often where the problem lies.”

Brolin claims it may seem excessive, but she urges practitioners to advise clients that hire in-house bookkeepers to conduct background checks if these individually are not accountants. More often than not, small businesses simply do not want to spend to hire experienced, in-house talent to run their books and as such run the risk of these individuals acting non-ethically.

She has, in fact, seen numerous cases where a cheaply hired staffer in charge of bank statements and paying invoices would write some of the money to themselves or another account they accessed. By the time it was detected, they had left with tens of thousands of dollars or more.

In all accounting and tax fraud prevention, Brolin says diligence is key and practitioners can play the most important role.

“I have two investigations now, where we are going through data files and comparing initial evaluations of what a tax filing says and what the backup data says. We find that in a lot of cases we don’t see book to tax return tie backs,” says Brolin.  “We end up with clients under criminal investigation for various reasons and there is often extreme lack of due diligence on the part of the practitioner or lack of determination to get to the bottom of it.”

In addition, much like with data security, accounting fraud can impact both client and practitioner simply in how they share files. One of the most common, and risky ways files are exchanged is via email. Brolin advises that this may be a convenient way to exchange files, but the lack of security in email exchange can open firms and clients up to potentially fraudulent activity as well, through willingly or unwillingly sharing sensitive financial information.

“Clients make requests and we want to appease them, but sometimes you have to push back. If they want to share some financial information and email that report you have to say I will not do that and use another method,” says Brolin. “It will compromise you and your practice. Yes it’s easy, but it opens you up to potential fraud. I’ve learned to work paranoid about every piece of data exchange.”

Brolin also notes that accounting fraud prevention can be a value-added service offering for clients, as accountants are uniquely position to advise small businesses on best practices for avoiding potential pitfalls.

“Have more conversations with your client base, they need to be as aware as possible that lots of things that can change their lives as well as your practice,” says Brolin. “As trusted advisors, you need to be aware of the fraudulent things that can happen every day that you can advise on. This is a great, value-added service and there’s regular checklists you can do for your clients.”

Dawn Brolin CPA, MSA, and Advanced Certified QuickBooks ProAdvisor is Managing Member of Powerful Accounting, a national accounting, tax, and QuickBooks consulting Firm. She will be speaking on Detecting and Preventing Accounting Fraud at the upcoming Scaling New Heights event in New Orleans, June 21-24. Please visit this link for more information and event details.

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