Maintaining a QuickBooks data file alone cannot eliminate bookkeeping fraud and embezzlement, but when its security features are used properly in conjunction with good business practices, the combination can make theft significantly more difficult and less tempting in a difficult economic environment. Prevent bookkeeping fraud and use these 22 best practices for eliminating, deterring and detecting company theft.
1. Use double entry accounting for all client receivables.
Make sure all client payments are made against invoices. Ensure the business owner or only trusted advisors have access to handling client payments or they go to a secure location and immediately deposited. Large organizations almost always require payment remittance to a secure post office instead of getting mixed with general company mail. Closely examine aging reports, maintain client contact to ensure payments have not been remitted but not credited against their account.
2. Perform Bank Reconciliations Once a Month for Each Bank and Credit Card Account.
ALWAYS use a different individual for posting payments and receivables than the person who is responsible for catching discrepancies through reconciliations. Likewise, responsibility for reconciling the credit card should lie with a person without authority to utilize the credit card. Promptly review any bank reconciliation discrepancies with the business owner(s). In particular, manually calculate “merchant fees” on credit card deposits to ensure that withdrawals batched with the credit card deposits are reasonable merchant fees and are not hidden refunds to a third party not recorded on the books.
3. Implement an Expense and Reimbursement Policy.
All credit cards should be directly billed to the employee rather than to the company. Design expense reports for each employee to turn in with original receipts with the proper coding. The policy for expenses should set a per diem limit to control the amount of cash being spent. An expense policy enables all employees and officers to know which expenses are eligible for reimbursement. Employees are subject to greater accountability for spending when they become responsible for writing the checks themselves to pay their credit card balance.
4. Limit Manual Checks.
Manual checks should be removed from the process as much as possible. Ensure bookkeepers with check creation capability do not have the ability to delete checks from the register and cannot print checks without saving them. Ensure the commercial bank account does not permit CASH debit cards or cash withdrawal and does not permit cash back on deposits. Blank checks should be kept in a secure location.
- Missing Checks. At regular intervals, use QuickBooks reports to help review the clients’ exposure.
- Voided/Deleted Transactions. For attempted tampering, more recent versions of QuickBooks software provide another protection. Now if someone prints a check from QuickBooks, it forces the transaction to be saved before being printed. Therefore, if a check is deleted from the system after it has been issued, it can still be found under the Reports menu, Accountant & Taxes, Voided/Deleted Transactions Report.
In QuickBooks, create a Credit Card Liability type account in the Chart of Accounts for each business credit card. This will allow you to utilize Online Banking and download transactions on a daily basis to monitor the charges that are being made on the company’s behalf or uncover any potentially unauthorized transactions.
6. Ensure the Undeposited Funds Account Is Cleared; Move from Use of Clearing Accounts.
The Undeposited Funds account in QuickBooks should always be cleared to a Bank Account. You should review this account to ensure that the funds are being deposited into real corporate accounts rather than fake accounts in QuickBooks. Additionally clearing accounts can be another way to make it harder to trace transaction flows in QuickBooks.
7. Review Outstanding Checks and Deposits That Have Not Cleared the Bank and Are Aging.
Typically transactions clear a bank within 2-3 days. Aged outstanding checks or deposits should be reviewed to make sure that they are not duplicate transactions, errors or way to hide fraudulent activity such as deposits that are not real.
8. Utilize Online Banking to Match Expenses and Deposits Real-Time.
With the Online Banking feature, you can download transactions on a daily basis to stay on top of what has cleared the bank. The person cutting checks or making deposits should not be the person with access to Online Banking. Related duties can also be segregated among employees, so that one staff member enters Vendor Bills and another staff person uploads the Bills through Online Banking for payment.
9. Review Accounts Receivable Reports and Be Sure Customer Records Are Complete.
Customer collections are key to verifying that Sales recorded in QuickBooks are accurate. If collection calls are not made and the customer records are incomplete, there is no verification that the sale really occurred. Similarly, monitor the agency or person who’s duty it is to collect bad debt and implement checks and balances to ensure that debt that was previously written off was not collected later on behalf of the company and never received in the register.
10. Calculate Sales Commission on Cash Received, Not Accounts Receivable.
To help ensure that sales numbers are accurate and not inflated, commissions can be based on cash collected on Sales rather than open invoices. Sales Reps can be created in QuickBooks to track their sales and what has been collected. As an added benefit, this approach incentivizes the sales staff to help with collections.
11. Limit Permissions for People Entering the Bills So They Cannot Also Cut Checks.
Ensure that employees that are entering the bills are not the same people authorized to issue and sign checks for the company.
12. Use Purchase Orders for Inventory.
A company’s purchasing department should utilize Purchase Orders in QuickBooks to show that products or services requested are approved and quantities accurately reflect the individual price paid and number of items received. Physically account for inventory and ensure that one person is responsible for physically opening and counting inventory received, and that the Packing List matches the physical count and matches the Purchase Order and matches the vendor’s invoice.
13. Implement a Physical Inventory Count Periodically.
By performing a physical inventory, your client can stay on top of their inventory asset values to ensure inventory has not been stolen or is missing. Two people should do the inventory count together, if it is not done by the owner. Implement physical security and a “check out” procedure utilizing a bar code scanner or other secure method of tracking inventory assignments to locate missing inventory.
14. Ensure Vendor Records are Complete and W9’s Are Requested from All Vendors before Payments Are Issued.
Make sure to always request a W9 from a vendor before payment is issued. The information from the W9 will be entered into the Vendor record in QuickBooks in the Vendor Center. One person should be in charge of setting up vendors and a different person assigned to enter vendor bills. Ensuring you have a W9 on file is a great way to prevent “fake vendors” from being created.
15. Have Sign-off Approval before Checks Are Issued to Vendors.
Before vendor checks are printed or sent to Online Banking for payment, management should approve and sign off and authorize which bills are to be paid.
16. Eliminate or Track and Reconcile Petty Cash.
Petty cash can be set up as a Bank type account in the Chart of Accounts. This will enable it to have its own register like any other bank account. Expenses then are properly tracked and recorded, and transfers between the Bank account to Petty Cash are monitored.
17. Set User Permissions to Limit Access According to Job Description.
Under the Company menu, choose Set up Users and Passwords, Set up Users. The User Permission levels are very different depending on whether your client is on QuickBooks Pro/Premier versus Enterprise. No matter which version you are using, you should ensure that the permissions match a documented job description. Secure passwords should be set up for each user in the QuickBooks file.
18. Don’t Share Passwords!
Many clients share passwords, especially when they don’t set up users for each staff person or need Administrator access to make changes in QuickBooks, thereby losing control of permission security and audit trails of who has made which changes. Try your best to prohibit your clients from sharing their password, keeping it on a visible post it note, or giving out in any other way. It is recommended that only the Owner or someone in upper Management controls the Administrator password to make changes requested from QuickBooks users.
19. Set a Closing Date and Password.
Under the Company menu, choose Set Closing Date. Then choose the Set Closing Date button on the Accounting Preferences screen. After month-end procedures are completed, set a Closing Date and Secure Password so that other users in the QuickBooks file cannot modify the financial data.
20. Watch for Dates Being Changed on Transactions.
If someone has access to the Closing Date Password or the Password was not set, utilize the Closing Date Exception Report, found under the Reports menu, Accountant & Taxes. This report will help you track if any transactions had any changes such as date, amount, coding, etc. since a prior period was closed.
21. Utilize the Audit Trail Report.
Under the Reports menu,Accountant & Taxes, choose Audit Trail. This report will give you insight into anything that has been changed or modified. This report helps if you find a problem or have a concern about the accuracy of data entry. Additionally, it will let you know which user of the file made the change and when.
22. Perform a Physical Count of Fixed Assets at Least Once a Year.
The Fixed Assets of a company are often ignored. As a result, these important assets can sometimes “walk” and be expensive to replace. Utilize the Fixed Asset Item List to track the Fixed Assets of the company and keep a detailed sub-ledger.
These 22 tips will help you prevent fraudulent transactions, identify and prevent company theft, and help to ensure accurate and honest bookkeeping. If you would like help implementing these tips or would like a fraud prevention and bookkeeping consultation, visit our contact page or call us at (410) 715-3657.