If you’ve discovered financial fraud (or suspect it) in your business, then you’ll want to tread lightly and learn how to prevent and recover from fraud.
The primary goal to detect or identify financial fraud in your business is the relationship between your accounts, your transactions, and your employees.
This relationship is what shows you where potential fraud occurred (and where fraud may occur in the near future).
Below, I’ll share how to prevent financial fraud, as well as some basic steps you can take to clean up financial fraud once it already occurs.
While what I share in this article is useful, let me take care of your accounts for you, so you can get back to focusing on growing your business.
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How to Prevent Financial Fraud in Your Company
There are three major ways you can prevent financial fraud:
#1. Restrict access to your accounts or, give person-specific credentials.
For those permitted, allow access to your accounts for the specific jobs and responsibilities given. Only the most trusted employee, freelancer, or consultant should ever have access to your accounts. Conduct a background check on each individual or, if you’re outsourcing, ensure that there is a clearly defined Services Agreement spelling out Confidentiality, access, etc.
#2. Close each accounting period
Have you ever heard of “hiding in plain sight”? This is how fraud usually occurs and goes unnoticed for months or even years. The fraudulent actions take place in plain sight – in accounts that are either not closed at the end of each period or not reconciled to current. When accounts are not managed properly, it allows for miscellaneous or ill-defined transactions to happen without anyone knowing. Closing account periods also disallow hiding fraudulent transactions in prior years.
#3. Set up and manage employees/staff with their own usernames and passwords
If your current accounting system uses “admin” for the username and everyone uses it, then you have no idea who’s actually in your accounts causing mayhem. Yes, creating usernames and passwords for each employee/staff may be an extra step, it helps protect you, your cash, and your company from becoming the target of financial fraud.
With that being said, this is not an exhaustive list, but it’s a start for you to prevent financial fraud in your business.
How to Reveal Financial Fraud in Your Business
The primary goal is to identify the following in your accounts to pinpoint the fraud and how it happened:
- Differences that are not expected
- The absence of differences that are expected
- Potential errors
- Potential fraud and illegal acts
- Other unusual or non-recurring transactions or events
How do you determine fraud, where it happened, and how? A fraud examiner will use the following tools to review your accounts and give you a detailed breakdown of what went wrong:
- Comparative Techniques
- Financial Relationships
- Assets Versus Liabilities
- Sales Versus Cost of Goods Sold
- Sales Versus Accounts Receivable
- Sales Versus Inventory
- Profit Margins
- Unexpected Relationships
- Percentage Analysis—Vertical and Horizontal
- Financial Ratio Analysis
- Current Ratio
- Quick Ratio
- Debt-to-Equity Ratio
- Profit Margin Ratio
- Receivables Turnover Ratio
- Collection Ratio
- Inventory Turnover Ratio
- Average-Number-of-Days-Inventory-Is-in-Stock Ratio
- Asset Turnover Ratio
- Cash Flow Analysis
Each and every one of these approaches (and more) helps reveal and identify financial fraud in your business.
Once you determine the fraud, how it happened, and who committed it, what’s next?
How to Reconcile Business Financials After Accounting Fraud
You could reconcile your own accounts after financial fraud, but it would take you weeks to months or even years to do it yourself.
Instead, you can bring on a fraud examiner to dig into your accounts and complete the process and approaches shared in this article (and more).