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June 11, 2019

Implementing Internal Controls to Prevent Payroll and Accounting Fraud

Fraud can plague any business. Specifically, employee fraud is more common than we think, with small organizations, less than 100 employees, being the most common victims. Internal controls are critical and help organizations protect themselves against fraud. Proper internal controls ensure that the flow of information into an organization’s accounting system is reliable and accurate. With the proper internal controls in place, management will have accurate and timely reports to run the business. Below we discuss a few internal controls to focus on to prevent payroll and accounting fraud in your company.

Segregate Duties

When thinking of internal controls, most of us think the segregation of duties. Small and medium-sized organizations tend to struggle the most with segregation of duties merely due to their size and number of employees. For a majority of these organizations, there is just one or two employees handling the books and therefore working on all aspects of the accounting process, including authorization, execution, custody and posting of transactions. Ideally, the processing of cash receipts and payments would be separated, with different people approving invoices, preparing checks, signing checks and reconciling the bank accounts. Allowing one individual to handle cash or checks received, the deposits, and the posting of payments in the accounting system increases the risk of fraud. These processes should be segregated amongst different individuals. If this is not feasible for an organization, it may be beneficial to consider an outsourced accounting department to handle your accounting processes as they are able to implement the level of controls and segregation of duties necessary.

Limit Accounting System Access

Access to accounting systems and financial information is another area of opportunity within small and medium sized organizations for an employee to be able to manipulate data to defraud an organization. The most common accounting software systems allow users the rights to edit, add, and delete transactions, vendors and customers. Ideally, users will be set to have separate levels of access within an accounting system. An outsourced accounting department with the administrative rights to the accounting software would greatly reduce the chances of any employee being able to create false entries and/or deleting transactions.

Keep an Eye on Payroll

Another area within an organization that may experience fraud is the payroll department.  Common payroll fraud scenarios include: an employee inflating hours worked on his or her timesheet, and employee access to payroll that allows for the issuance of payments to fictitious workers. Small and medium-sized companies typically manage payroll in house, which leads to a greater risk for these types of payroll fraud. Outsourcing payroll along with your other accounting functions creates the necessary controls over the payroll process and can even include a time tracking system that is monitored and reviewed by outside accountants for accuracy and reliability.

Regardless of the size of your organization, it is possible to reduce the risk of fraud. Outsourcing accounting is one of the easiest ways to increase your internal controls to combat fraud. Outsourcing provides an immediate separation of accounting duties and review process to an organization’s books that will provide peace of mind to business owners. Fraud happens, and accounting and payroll departments should never run on employee trust alone. Contact an Anders advisor to learn how your organization could benefit from outsourcing, or learn more about our Virtual CFO services.

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