Accounting fraud alludes to the intentional manipulation of financial statements in a bid to create a false appearance of the financial health of a particular corporation. The process can be undertaken either by an employee, an accountant or even the organization itself in a bid to mislead shareholders as well as investors (Nickolas, 2021). A company is said to be involved in accounting frauds when it falsifies its financial statements in a myriad of ways including overstating the revenues, not recording their expenses, or misstating liabilities as well as assets.
Within a company there are several areas where accounting frauds are possible. They include the following (Verver, 2013):
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Purchase-to-Pay - some of the potential risks of fraud include an employee undertaking purchase orders for services and goods which are diverted for personal utilization or an employee may set up a ‘phantom’ vendor account, whereby the fraudulent invoices are undertaken and payments made to them.
Corporate Credit Cards - this is among the most common fraud risks where employees usually use their corporate credit cards for personal gain in lieu of legitimate corporate transactions or entertainment or travel expenses.
Payroll - this is also another common accounting fraud where ‘ghost’ employees are set up on payroll systems. It also involves disproportionate overtime payments or employees remain on the payroll even after death or termination.
Sales and Receivables - this type of fraud occurs when an employee colludes with sales representatives and vendors in order to inflate sales so that they can attain higher bonuses and commissions.
These are some of the areas where most of the employee frauds occur and they thus result in accounting frauds and can significantly affect the organization in regards to its finances because it leads to an imbalance in the expenses of the organization. It also leads to misrepresentation of data and information, which, in itself, has significant adverse impacts on the organization.
Designing Method of Detection and Limiting of The Frauds
Several methods can be used to detect and limit the propagation of the fraud. In order to detect and limit the purchase-to-pay fraud, detection systems can be set up. For instance, the fraud tests can be formulated detect if the same person both enters and approves a purchase order or if the person enters and approves several split purchase orders. Similarly, fraud tests can detect if there is fraud by discovering data such as the similarity of the employees address with that of the delivery address, whether the purchased goods are usually consumer items, or whether the information on the vendor master file is similar to that of an employee. If such flags are found, the purchase order can be cancelled and further actions taken to limit the fraud.
In regards to frauds under corporate credit cards, detection tests can be made on purchasing cards being utilized to acquire services and goods from vendors with suspect merchant codes. Additional tests are undertaken to determine if fuel being purchased is in unusually large quantities and whether the corporate transactions are being undertaken by the card holder. If any flags are found, the purchasing card can be frozen and further actions taken to limit the fraud.
In regards to payroll frauds, detection tests can be done to determine if there is more than one employee with the same address or details of bank accounts. Similarly, detections can determine if the employee has invalid social security numbers, invalid addresses, unusually high overtime amounts, as well as determining the status of the employee in accordance with the human resource records i.e., deceased or terminated.
To design methods to detect frauds in sales and receivables, detection systems can be set up to detect accounts of customers with extraordinary credit terms, customer accounts which have frequent or significant credit memos, customers that receive extraordinary amount of discounts, customers returning goods without an equivalent change to the commissions of the sales representatives, as well as detecting shipment addresses of sales that are similar to that of an employee’s address.
Recommendation Letter
April 17 th 2021
Address
Dear CEO,
I am composing this letter to sensitize on the significance of installing an accounting information system and thus recommend for its installation in the company.
An accounting information system alludes to a structure which businesses utilize to collect, manage, store, retrieve, process, and report its financial information and data so that it can be utilized by consultants, accountants, managers, analysts, regulators, tax agencies, as well as auditors.
The research findings showcase that there are higher chances of accounting fraud especially in large organizations where follow-ups can be difficult. Similarly, the findings are that it is usually very easy for employees to undertake frauds which can add up to accounting frauds and thus significantly affecting the company’s finances, while exposing it to the risks associated with the financial or accounting fraud. Instances such as the Enron case showcases the significantly deleterious impacts accounting frauds can do to companies and their reputation.
The recommendations are that the company should implement and adopt the accounting information systems so that it can be easier for the company to collect, store, process, and report financial data. Therefore, the company should invest in the necessary hardware and software in order to actualize and implement the accounting information system. Such information can be obtained from the IT department and further information can be provided upon request.
There are significant benefits associated with the implementation of the accounting information system. One of the major benefits is efficiency as computerized financial information systems are faster and more efficient in the processing of data and information. Another benefit is that accounting information systems are cost effective as they automate some parts of the accounting process meaning that they do most of the work which would otherwise require several employees. Most importantly, they allow for increased accuracies and reduced errors in the accounting process and also allow for more transparency.
Consequently, the accounting information system should be implemented to realize such advantages and allow for transparency within the organization to decrease the risks of accounting frauds.
Kind Regards
Accountant
References
Nickolas, S. (2021). What Is Accounting Fraud? Retrieved 17 April 2021, from https://www.investopedia.com/ask/answers/032715/what-accounting-fraud.asp
Verver, J. (2013). The Top Five Areas to Monitor for Employee Fraud. Retrieved 17 April 2021, from https://www.cfo.com/accounting-tax/2013/11/top-five-areas-monitor-employee-fraud/
