Digging Into Business Records to Look For Red Flags

Finding evidence of fraud in a business doesn’t always take the skills of super-sleuth. Sometimes there are simple giveaways that point to things being out of the ordinary. Let me demonstrate….

Accounts aren’t reconciled. If part of an employee’s basic job duties includes the reconciliation of accounts, the fact that one or more accounts is left unreconciled is a problem. Maybe it’s as simple as a performance problem on the part of the employee. Maybe it indicates the employee has too many assigned duties. Or maybe the employee isn’t reconciling the account because it can’t be reconciled due to fraud. And if the unreconciled account happens to be a bank account – watch out!

Sometimes employees are clever enough to steal. Or maybe the company’s systems of checks and balances are so weak that it’s easy for the employee to steal. Yet she or he might not be clever enough to cover up the fraud. Therefore, the employee doesn’t reconcile the accounts in a feeble attempt to hide the fraud.

Improperly recorded transactions. When transactions are recorded improperly, a company again has to consider whether an employee has job performance problems, or whether a potential fraud is occurring. If transactions are recorded in a way that makes the financial statements look better than they should, it is quite possible that manipulation of the numbers is occurring.

Adjusting entries at the end of an accounting period. Like the improperly recorded transactions, one has to look at adjusting entries and consider whether they improve the company’s financial statements. Are the entries warranted by the situation and supported by the accounting rules, or could the entries be made in order to manipulate the financial results.
Entries without supporting documentation. A simple rule in any accounting department is that any entry made into the accounting system must have documentation to support it. If there is no supporting documentation, especially for an unusual transaction, it merits more scrutiny.

Unusually high voids and credits. Accounting systems at companies are usually designed with a standard procedure for applying payments to customer accounts. When accounts are adjusted with voids or credits, it should be considered unusual. This shouldn’t normally occur a lot, and if it does, there is obviously reason for suspicion. When an employee is stealing customer payments, the way to cover it up often is through a void or credit.

Up next: Management issues that point to fraud

Tracy L. Coenen, CPA, MBA, CFE performs performs fraud examinations and financial investigations for her company Sequence Inc. Forensic Accounting, and is the author of Essentials of Corporate Fraud.