Having strong internal controls and avoiding customer, and employee fraud is essential to running a successful business, however a large amount of small business to mid-sized businesses are functioning with weak or minimal internal controls.  It is sometimes in our nature to trust those we work closely with but when it comes to internal controls and fraud, we should also remember that no matter what the working relationship is, where there is weak internal controls, there most likely is fraud.  Implementing proper internal controls and processes will ensure that customers receive a uniform experience, will help you keep tabs on your business finances and will help to catch fraud.  Using an accounting system like QuickBooks can help with this, but its also important to implement processes that provide appropriate checks and balances outside of QuickBooks.  Below are some processes that will be appropriate for many companies using QuickBooks accounting software: (presented in no specific order)
  • Transaction Dates and Audit Trail - Often when fraud is occurring, the offending employee will need to change dates on fraudulent transactions to exclude it from reports or to cover up the fraud at a later time.  Use the Closing Date Exception report to determine which transactions were changed in closed periods.  Also, use the audit trail report to determine what transactions have changed or been modified.  Discuss the modified transactions with those that changed them and note reasons for the changes.
  • Sales Commissions - calculate these commissions on payments received from customers rather than on invoices sent to customers for payment.  This will help to ensure that sales are legitimate and accurate and also encourages sales reps to be involved in the collection process from the beginning.
  • Bank Reconciliations
    • In typical small businesses, bank reconciliations should be performed once a month for each credit card account and bank account.  In larger companies where higher transactional volumes are present, you may consider using online banking to perform daily reconciliations.
    • Where possible, employees that enter bills, print checks, receive customer payments, record deposits, or enter credit card transactions into the system should not perform bank reconciliations.
    • When performing the bank reconciliations, compare the vendor names and amounts in the banking register with the names and amounts listed on the bank statement or on the copies of the checks returned by the bank.  In smaller companies, have the owner open the bank statement and scan the transactions and copies of checks.
    • Use the Previous Reconciliation Discrepancy report which shows transactions that have been deleted or changed since the last reconciliation and note reasons for the changes.
    • Look at old outstanding transactions such as checks and deposits that have not cleared the bank to ensure these are legitimate.
  • Expense Reimbursements and Company Credit Card Accounts
    • It is always better to have employees charge reimbursable items to their personal credit cards and then require them to submit an expense reimbursement request.  This way, expenses can be approved before the disbursement is made.  If needed, a pre-authorization section on the reimbursement form can also be included, enabling the employee to gain pre-authorization before charging the amounts to their personal credit card.
    • If using employee personal funds for the initial purchase is not possible, you may need to issue company credit cards to selected employees.  In this case, enforce an automatic termination policy if it is discovered that an employee has charged a personal expense on the company credit card.  Also, require that receipts for purchases be submitted along with a form providing a description of the charges.  Use online banking in QuickBooks to download credit card transactions from the bank on a daily basis so you can know of the charges immediately and detect unauthorized charges.  Have someone follow up with the employee to obtain receipts as the charges occur.  To download credit card transactions into QuickBooks, you'll need to create a credit card account (liability) for each credit card.
    • Whichever method you use, implement a policy that specifies dollar amounts of reimbursable expenditures.  An expense policy allows management and employees to know which expenses are eligible for reimbursement and in what time frame the reimbursement can be expected.
  • Petty Cash - Ensure that the amount of petty cash on hand at any point in time is the same amount that shows up on reports.  Monitor transactions such as reimbursements and checks to replenish petty cash that go through this account.
  • Cash Report - prepare a weekly (or daily in large organizations) cash report for management that shows cash received and payments made on a summary level.
  • Undeposited Funds - Ensure all transactions in the Undeposited Funds account are cleared and that these transactions are deposited into real company banking accounts.  When payments from customers are received, these payments initially show up in the undeposited funds account.  Once these payments are deposited into the bank account, they are cleared from this account.  Ensuring that the transactions in this account are cleared in a timely manner will prevent erroneous transactions coded to this account.
  • Accounts Receivable
    • Review customer balances and outstanding invoices with all involved in the sales and collections process at least once a month.
    • Send customer statements out at least once a month.
    • Have collections personnel keep notes on collection efforts and where possible, employees that create invoices, enter customer payments, and that record deposits, should not be involved with the collections efforts.  One way of verifying that the sale actually occurred is by the subsequent customer payment so if collection calls are not made and a payment is not received, there isn't a verification that the sale actually occurred.
  • Accounts payable
    • Where possible, start the payables process off by using purchase orders for the approval of an expense.  Then when the bill does arrive, it can be matched up to the original purchase order and paid.  Bills received that do not match up to a purchase order should at very least be approved by a manager.
    • Have a manager approve all checks/payments to vendors by using the Unpaid Bills Detail report in QuickBooks.
    • Where possible, employees entering purchase orders, receiving items, and entering bills should not be performing the pay bills or Print Checks functions.
    • Request a W-9 form from all vendors before payments are made to the vendors and enter the information from the W9 into the  vendor record in QuickBooks.  Having W-9 forms on file is a step to help prevent erroneous vendors from being created in the system.
    • If using physical checks rather than electronic bill payments, use blank check stock that doesn't have your bank's routing and account number already printed.  Then use software that prints this information on to the check when the payment is made.  If this is not possible, physically lock check stock in a drawer or file cabinet.
    • Keep manual checks to a minimum if you cannot eliminate them completely.
    • Use QuickBooks reports to find missing check numbers and account for the discrepancies.
    • Use QuickBooks reports to find voided or deleted transactions and account for the reasons why these transactions were voided or deleted.
  • Fixed Assets
    • Perform a physical count of all fixed assets such as computers and software, furniture, machinery and equipment, etc. at least once a year.  Compare this physical count to the fixed asset listing used to calculate depreciation.  List any assets purchased and disposed of in the current year separately and account for any discrepancies.
    • Physically secure large or expensive items where possible.
  • Inventory - Perform periodic physical inventory counts and compare to the QuickBooks reports and account for any discrepancies.  Where possible, employees that do not handle the stock on a day to day basis should perform the physical inventory.  It is also suggested that two counts are performed in teams of two where the teams are assigned by management.
  • Reconcile all Balance Sheet accounts - Develop a process to reconcile and verify all balances on the balance sheet at least once a month and keep work papers showing backup documentation.  Prepaid accounts, accrual accounts, and other accounts should all have schedules that match to the balances shown on the balance sheet.
  • QuickBooks Users and Permissions
    • Use QuickBooks permissions to separate tasks and functions.  For instance, limit bank reconciliation access to those that enter bills, print checks, receive customer payments, record deposits, or enter credit card charges or limit access to paying bills and printing checks if the employee also enters purchase orders or bills.
    • Use the "External Accountant User" in QuickBooks only for the accountant, advisor or consultant since this user gives administrative access to your file.
    • Passwords should not be shared among employees for any reason.
    • Enable QuickBooks customer credit card protection within QuickBooks whether you accept credit cards from within QuickBooks or not.  Enabling this feature will require users to change their passwords every 90 days and will require stronger passwords that must contain special characters, numbers and capital letters.
  • QuickBooks Closing Date - use the QuickBooks closing date feature to lock transactions prior to a date and be sure to assign a password.  Each time a month is closed, change this date to the most recent closed period.
  • Clearing Accounts - In some cases, the use of clearing accounts is necessary, however where possible, avoid the use of these clearing accounts.  Using clearing accounts can complicate the accounting process and make the flow of transactions more complex so using these clearing accounts can be a way to make it harder to trace transactions.  Utilize the the features of QuickBooks and use the recommended transaction flows where possible so that  transactions can easily be traced making clearing accounts unnecessary.
  • Develop a schedule for closing out each month - this schedule should include time frames for entering employee time and sending out invoices, closing out payables for the month, performing bank reconciliations, entering adjusting entries, etc.  Typically, small businesses should be able to close out a prior month by the 15th of the following month easily.
  • Industry-Specific Applications and CRM Packages - Where possible, integrate other applications such as quoting or commissions tools, customer relationship management software, advanced inventory software, point of sale packages, project management software, etc. that are used in the office with QuickBooks.  If integration with an industry specific application is not possible, develop a strategy for auditing the systems so that balances and transactions are correct.
  • Client Data Review feature in QuickBooks - Use this feature to view any changes made to lists such as the chart of accounts, Items, vendors, and customers.  This feature will identify what has been added, changed, deleted or merged within the lists and will allow you to troubleshoot beginning balances, review open credits and payments in accounts receivable and accounts payable, and many more items.
Call us today if you need help implementing any of the items above.