By Barry Schimler, CPA

Year end is a prime time for businesses to review their operations for ways that unscrupulous employees or external criminals might be able to exploit weaknesses in their internal controls and steal their hard-earned dollars. This article suggests how business owners can, with their CPAs’ help, perform a year end fraud review to catch wrongdoing and make it harder for fraudsters to get away with anything.

Strategically speaking, year end is typically a busy time for business owners. Among the many things on your mind may be (or, at least, should be) tax planning. After all, you don’t want to give Uncle Sam any more than you absolutely need to.

But do you know who you should make sure doesn’t get any of your money? Fraudsters. Yes, year end is also a prime time to review your operations for ways that unscrupulous employees or external criminals might be able to exploit weaknesses in your internal controls and steal your hard-earned dollars.

Look for clues

First and foremost, don’t think you have to undertake a year end fraud review alone. Enlist the help of a CPA to perform an internal control or forensic audit of bookkeeping records, invoices, bank statements, payments, journal entries, financial reports and other records with an eye toward identifying doctored, forged or missing documents.

Together, you can examine some of the key areas of your company to look for wrongdoing. Your books, for instance, are a major information source. When stolen assets aren’t covered by a fictitious entry, the books may be out of balance. An end-of-year inventory of merchandise can bring missing assets to light. And monthly cash reconciliations are highly informative as well.

In addition, be wary of unusual numbers of journal entries posted near the end of any accounting period (monthly or quarterly). They could be adjustments made to cover theft or misappropriation.

Accounts receivable and payable will need a thorough going-over, too. When customer payments are misappropriated, fraudsters may adjust receivables to cover the shortage. Similarly, adjustments to payables may signal phony billing schemes.

Dig deeper

After reviewing these key areas (and others), isolate any items or circumstances that seem suspicious. Then start digging deeper. Don’t assume, for example, that the first employee you find cooking the books is the only one exploiting the gaps. Fraud schemes often involve more than one person and can be committed by people outside the company or by a combination of employees and outsiders.

Of course, you want to be discreet and cautious. Genuine errors or an ill-designed process may be at fault for accounting irregularities. And by catching such mistakes, and correcting them with training or procedural improvements, you can not only deter fraud, but also improve your operational efficiency.

Think about next year

As your fraud review winds down, look for ways to make this process a little easier next year end. Start by assessing the effectiveness of your internal controls and looking for ways to tighten them. A control that may have been effective two years ago or that was appropriate for one job may not meet your organization’s changing needs or address the risks associated with other jobs.

For example, the monthly bank reconciliation should be performed by a person who has no responsibilities concerning the writing or issuing of checks or for depositing cash. If one person has been performing this task for a long time (perhaps more than two years), it may be time to give the job to a different employee.

Additionally, determine whether you’re gathering enough data about fraud during the year. If you haven’t already established a system for employees, vendors, customers and the public to report suspicious activities, think about doing so. Confidential hotlines can cut fraud losses substantially.

Don’t expect a refund

If, come tax time, you overpay Uncle Sam, you’ll likely get your money back eventually. Not so with fraudsters: Once they get ahold of your money, those dollars are usually gone for good.

That’s why taking some time now, at year end, to look back — and look ahead — for ways to catch and prevent fraud can really pay off. Of course, fraud detection should be a year round activity as well.

For more information on how to prevent and deter fraud through a year-end fraud review, contact Barry Schimler, CPA at bschimler@bspj.com or 678-741-2510.