30-Second Summary:

  • Trusting your existing accounting systems and your accounting employees may not be enough to keep you safe from fraudulent activities.
  • Segregating authorities in the accounting system increases accountability, and it becomes easy to trace all accounting work for transparency.
  • You need to disable backdating of accounting transactions to make it difficult for the accounting information to be manipulated.
  • You need to install and optimize appropriate accounting software to help you manage your accounts well.
  • Regardless of the software you use, try segregating the authorities, deactivating back-dated transactions, activating audit logs and disabling transaction deletion.

 

Fraud and embezzlement of funds occur when your employees divert funds from your business for their personal or non-business use. If not addressed early enough, they can bring down your entire business within a relatively short period of time.

Your accounting staff can misuse your company’s funds in various ways, including misappropriation of assets, non-recording of cash income, over-recording of expenses and payments for their personal expenses. Large businesses have dedicated internal audit and forensic investigation resources to mitigate these risks. However, in a small business, owners have to oversee the accounting processes and identify any anomalies themselves. If not identified at the right time, you will always count losses by the end of every financial year.

How to Optimize Accounting Software to Prevent Fraud?

One of the common organizational frauds is related to accounting and bookkeeping, and many business owners are not even aware of their cash leakages. Trusting your existing accounting systems and your accounting employees may not be enough to keep you safe from fraudulent activities. To effectively get yourself off the hook, you need to optimize your accounting software in the following ways:

1.Activate Audit Logs

The first step to minimize fraud that occurs through the accounting software is to activate audit logs. This helps you examine the activities performed by different employees on the accounting system. Activating audit logs allows you to identify the users responsible for the errors or discrepancies. They also help you optimize your accounting software, so that cybercriminals can have a hard time accessing them. This is most important because some of the most common forms of accounting fraud are done by cybercriminals, who hack their way into your accounting systems and record fictitious entries or fund transfers.

2.Ensure Segregation of Rights

Segregating duties in your organization’s accounting department helps you keep check and balance over the individual actions. It is unhealthy, leaving the entire accounting tasks to the care of a single employee. The process of receiving invoices, reconciling them, and later filing them, and handling other bookkeeping roles can be overwhelming for one employee and grant them too much authority to manipulate the system.

With such stress and strain, it is easier for your accountant to commit errors which can be a leeway for fraud. Segregating authorities in the accounting system increases accountability, and it becomes easy to trace all accounting work for transparency.

3.Disable Backdated Transactions

Backdated transactions are the transactions occurring in the present times but posted into a prior period. When you activate the ability to backdate accounting transactions, your accounting staff can use this to manipulate previous-period figures. Since you, and the audit team, only focuses on the current period, the staff can park the transactions in prior years, making it difficult to identify. You need to disable backdating of accounting transactions to make it difficult for the accounting information to be manipulated.

4. Disable Transaction Removal

As the name suggests, transaction removal involves getting rid of the financial transactions that have already been cleared and closed from the system. When you allow your accountants to remove some of the transaction information from your financial systems, it becomes easier for fraudulent transactions to be deleted from the system and concealed from investigations. A common reason presented by the bookkeeping staff is the likelihood of human error. Even if there is a human error, an ideal accounting system does not involve deleting the transaction, but rather recording an opposing entry to neutralize an effect. For instance, if you accidentally record a debit entry for $120 instead of $100, you can always record a credit entry for $20 to nullify the impact of the original error.

5.Review Periodic Reconciliation

You already know how important it is to regularly review your bank reconciliation statement, but you somehow don’t keep up with the pace. It is essential that, as the business owner, you open and scrutinize the transactions recorded in the reconciliation statements immediately after you receive them. This, together with the earlier step of prohibiting back-dated transactions, means that you can focus on the current period issues.

6. Receive Daily Bank/Cash Movement Reports

One of the best ways of keeping track of your bank balance is to receive daily bank receipts and payment reports. You also need to ask for accompanying cash movement reports, so that you can trace the movement of cash and follow through transactions to understand how money was used. Doing this helps you identify mistakes and easily tackle them early enough before they escalate to unbearable levels. You don’t want your business going bankrupt based on wrong transactions; you could track and help salvage early enough by scrutinizing these daily bank and cash movement reports. Remember, no matter how complicated your accounting system looks, the most important ledger for you as the business owner is cash or bank ledger. As long as you thoroughly review where your cash is moving, you have the steering wheel in your hand.

7. Special Approval for High-value Transactions

A key way to optimize the accounting software is to incorporate the requirement of special approval for high-value transactions. You can assign this approval authority to yourself or someone else you trust. Keeping only the approval of high value-transactions in your hands saves time as you do not have to review every single transaction. It also helps mitigate the risk of major frauds or embezzlements.

Therefore, it would help if you came up with a policy that demands any transaction surpassing a certain amount should be spared for your approval. For instance, you can build control in the accounting system to automatically send you a notification email for transactions valued above $5,000 and an approval email if it is worth above $10,000.

8. Minimize Cash Use

Using hard cash to finalize transactions can make it easier for embezzlement of funds as there are no traceable records to show that a given amount was used in a given transaction. Cash is, in fact, easier to steal and requires far stronger controls for safe handling. If possible, limit cash transactions to petty cash needs and a certain daily amount. All other transactions should be through banks or the accounting software where every payment and receipt can be traced.

Conclusion

Getting ahead of fraudsters and cybercriminals is a critical task for you as the business owner. You need to install and optimize appropriate accounting software to help you manage your accounts well. Regardless of the software you use, try segregating the authorities, deactivating back-dated transactions, activating audit logs and disabling transaction deletion. These backdoors and loopholes can be exploited, and it is important to plug them from the very start.