Preventing Fraud with QuickBooks Software Controls

Earlier I talked about how to use QuickBooks and Segregation of Duties to prevent Fraud. Now I will discuss how to use the software controls within QuickBooks to deter Fraudulent activity.

One of the most important features within QuickBooks in the Audit Trail. The Audit Trail tracks who is making entries into QuickBooks. You especially want to see who is deleting transactions, such as checks. Since QB 2006, the Audit Trail cannot be turned off.

The next thing you want to do is to set up Roles and Passwords to limit each employee's access to QuickBooks. They should not have any more access than what they need to do their jobs. You especially don't want employees to be able view payroll information. Also, since each employee has his/her own sign on to QuickBooks, it is much easier to track them on the Audit Trail.

The next thing to do is to lock prior periods with a Closing Date. You definitely don't want employees to be able to go into QuickBooks and change information from prior periods.
For maximum security, assign a password to the Closing Date.

Finally, make use of QuickBooks reports. The Voided/Deleted Transactions Report and the Closing Date Exception Report are two that you would want to review on a weekly basis.

By following these suggestions, you can improve your chances of detecting suspicious activity in QuickBooks.

Fraud and QuickBooks

QuickBooks is a great Accounting program that provides tremendous value to Small Business owners for a very reasonable cost. In fact, it has 85% - 90% of the Small Business market. However, it can be very effective in allowing someone to steal your money, unless you take steps to prevent it.

So how do you prevent this?

The first thing you need to do is to understand the concept of Internal Control. Basically, you want to segregate duties so that no one person controls the whole process. You NEVER, NEVER want to allow someone (in many cases, the bookkeeper)to have physical custody of the asset and total control of the record keeping of the asset.

In other words, where there has been embezzlement of funds, the bookkeeper has been able to write and sign checks, make deposits, make the entries into QuickBooks and reconcile the bank account. A CPA friend of mine had a client, whose bookkeeper had those abilities and she stole $740,000 over the period of about 3 or 4 years.

Probably one of the most effective things that you can do is to have someone other than the bookkeeper (preferably the Business Owner) reconcile the bank account on a monthly basis. That way you can stay on top of your bank account. In future posts, I will discuss other ways you can use QuickBooks to prevent Fraud.

The Triangle of Fraud

The Triangle of Fraud.

In an earlier article I talked about the three major characteristics of a Fraudster. In this post, I will go into further detail. The first element is Opportunity. Employees that would fall into this category would be employees that are very trusted, sometimes very long term employees. Perhaps they are in a position of authority that would discourage other employees from questioning their actions. In any event, they have access to the assets and are considered unlikely to steal.

The second characteristic is Pressure. This is defined as having a Nonsharable Problem. This could be having a drug problem, gambling addiction, family medical problems, etc. In any event, the employee does not feel that he/she can share the problem with the company, usually because it would cause personal humiliation or a loss of face.

The final element is Rationalization. Did you know that many Fraudsters do not consider themselves bad people? They tend to think of themselves as victims of unfair circumstances. Sometimes they think that they are just borrowing the money and that they will pay it back. Other employees think that they are grossly underpaid and taken advantage of, thus they are just equalizing the scales. In any event, the ability to rationalize their actions allows them to begin and continue the Fraud.

When you think about your employees, do any of them share these characteristics? If so, it would be prudent to stay aware.

The Threat of Fraud to Small Business

Fraud and Small Business

Did you know that in 2008, the average organization lost an estimated 7% of gross revenues due to Fraud. Also, the median loss for organizations with less than 100 people was $200,000. These statistics come from the "2008 Report to the Nation on Occupational Fraud and Abuse" by the Association of Certified Fraud Examiners. In this down economy, the potential for losses caused by Fraud is especially likely.

The question for you as a business owner is , how can I recognize who might be a potential Fraudster? In this brief article, I will share with you one of the major theories as to who would be likely to steal from you.

In the 1940's, a Criminologist named Donald R. Cressey studied over 200 embezzlers and developed a theory as to what they all had in common. The theory that he developed is known as the Fraud Triangle, and it states that there are three major characteristics of the employees who commit Fraud.

The three elements are: Opportunity, Pressure and Rationalization. Opportunity - usually it is a person in a trusted position, someone who you would probably never suspect. Pressure - usually the employee has a problem that he/she feels that they cannot share. Rationalization - the employee thinks that he/she is really not stealing, just temporarily borrowing, etc. In a future article, I will discuss each of the three characteristics in greater detail.