Did you know that spending a couple of hours a month on your accounting could save you tens of thousands of dollars? According to a 2010 report by the Association of Certified Fraud Examiners (ACFE), 40 percent of small business owners are embezzlement victims and one-third of all bankruptcies are the direct result of internal fraud.
Protecting yourself from fraud is easier than you may think, even if you don’t know a thing about accounting. In this two part blog (5 Tips this week and 5 next) we will review simple tasks that can be performed utilizing whichever accounting software you have in your business. The examples and screen shots shown here, however, are from QuickBooks Enterprise 2013.
- Open the Mail and Review Credit Card and Bank Statements
This tip is number one for a reason and may be the most important thing you do for your business finances. In the best case scenario you should open and review all accounting related mail, including vendor bills and customer payments. If this seems too daunting a task or you find you are not in the office enough to make this work, be sure to at least open credit card and bank statements.
Once you begin reviewing charges and checks on a regular basis the easier it will become to spot irregularities.
- Missing Check Report
Check reports can be a valuable tool for several reasons. Obviously if someone is taking checks and not entering them in the accounting software this will highlight that activity. For me however it is also a way to see, at a quick glance, what checks are being written over a given period of time. For this to be most effective you will need to be sure you are tracking voided checks and keeping copies.
QuickBooks Example: In this QuickBooks report, detecting inconsistencies is made easy. Not only does it highlight where checks are missing but also tracks duplicates. When I run this report I also typically customize the report to include both the Entered/Last Modified and the Last modified by columns. Notice the Duplicate Document Number and Missing Numbers messages.
- Invoice Number Report
This may seem an unusual report to run but the thought process is the same as missing checks. There are well known cases where invoices are created and customers are directed to send payments to an alternate address or lock box.
QuickBooks Example: There is no in-product report for this but you can create it from the Missing Check report. Simply customize it by removing the Account filter and adding the Transaction Type – Invoice.
- Expenses by Vendor Report
I love this report. It’s the easiest way to get a snapshot of your spending over a given period of time. Review for unexpected vendors or erratic spending.
QuickBooks Example: The Expenses by Vendor Summary is probably the biggest bang for your buck in terms of fraud detection. It’s quick and easy to understand. When I review this report I typically like to customize it to include the previous year or period. This process highlights any new vendors or fluctuations in spending from prior periods.
Reports>Company and Financial>Expenses by Vendor Summary
- Profit and Loss
To many business owners the Profit and Loss report holds no meaning for them. Since they often don’t understand what the different accounts mean they will ignore this report all together. Regardless of whether you are that business owner, use this in the same way as the Expenses by Vendor Report. Look for fluctuations that don’t seem to match what you perceive as happening in your business. Was last month a busier month than the one before? If so you should see your income amounts increasing. Is your mortgage amount the same each month? If not, why.
QuickBooks Example: In a similar way as the Expenses by Vendor report, I typically customize this for the previous year/period or display columns by month. I also try to ensure I am doing this review for a period where I know the data entry has been completed.
Reports>Company and Financial>Profit and Loss Standard
See how easy that was to get you started. Not only are you taking the first steps in preventing Fraud, but many of these reports and practices can also be used operationally to analyze trends and spending. Be sure to look for part 2 of this blog next week when we discuss, among other topics, inventory and audit trails.