Preventing Of Accounts Receivable Frauds

A delivery of 500 gallons of ice cream was made, an invoice was created, the customer later made a payment, but the payment was not recorded in the journal. This is an example of fraud specifically, accounts receivable fraud because money was diverted and not recorded. Receivables for many organizations accounts for a large amount of revenue. Employees who steal money from receivables can have a direct effect on the liquidity of a company or business. It can also compromise a company’s accounting systems (Sessoms, 2018). If gone un managed, Organizations can lose damaging amounts of assets, and the overall effects of fraud could lead to bankruptcy or company wide shutdowns.

According to a 2010 survey by The Association of Certified Fraud Examiners (ACFE) 22 percent of company money fraud cases happen in the accounting department, causing U. S. companies a median loss of $180,000 on average each year. Organizations with anti-fraud policies and procedures such as fraud training, reporting, separation of duties, and internal auditing can experience up to a 50 percent reduction in fraud cases (AGA, 2018).

Fraud Deterrence

According to multiple sources’ fraud deterrence has gained recognition due to the 2002 Sarbanes-Oxley Act which federally increased accounting requirements of company owner’s, boards, managers, and accounting firms to protect stakeholders from fraudulent practices (Lord, 2018). The deterrence of Fraud is the proactive process of identifying and removing any factors of fraud before they happen. Teaching employees and managers how to recognize and report theft concealment methods, such as, skimming where funds are stolen before being reported. Lapping the mis-recording of customers payments to cover up thief. Check-for-cash the process of replacing stolen revenues with refunds or other unexpected monies, and mislabeling accounts as uncollectible or defaulted to hide stolen payments (Sessoms, 2018). Managers can monitor the turnover ratio to see how often receivables are converted to cash during a given period and compare it to previous quarters.

Employees can also observe a co-worker and manager behaviors, such as increased spending habits and change in attitude. Employers can require vacation time to allow duties to be rotated, and create reporting channels such as hotlines and other confidential ways to report. Organizations best chance at deterring fraud within the account’s receivable department is the separation of duties.

For example, employee A accepts payments and employee B records the official journal entry. Fraud preventionAuditing financial statements is a good way for a company to detect fraud within the accounts receivable department. When performed by and objective party, audits provide a reasonable amount of assurance to owners and investors that any and all financial statements and operational information disclosed is free from misrepresentation, and provides a true view of the business’s performance and financial standings (Staff, 2018). Internal auditors specifically “look at controls and procedures in use by their employer” (accounting book).

The goal of internal auditors is to insure the proper care of resources and assets. Organizations rely on independent internal auditors to assess the accuracy of accounting data and to evaluate risk management effectiveness. There are different ways internal auditors can ago bout auditing accounts receivables records, such as journal entry testing. Which consists of selecting large or unusual entries and asking for supporting documents such as receipts to confirm them (Freedman, 2018). To insure stakeholders that risk is being managed effectively.

Risk

Based Internal Auditing (RBIA) should be performed by internal auditors following The International Professional Practices framework (IPPF) guidelines set by The Institute of Internal Auditors (IIA). While the internal auditing should be a separate department, audits should be conducted in conjunction with management to improve operations, develop contingency plans, and help each department reach its individual objects.