In the realm of occupational fraud schemes, asset misappropriation takes the lead, accounting for more than half of all cases, as reported by the Association of Certified Fraud Examiners. This encompassing category encompasses activities ranging from skimming cash to inventory theft and the creation of fictitious employees for payments. A particular hotspot for such fraudulent activity is often found within the accounts receivables department, where unscrupulous individuals might attempt to divert customer payments for their personal gain. If your internal controls for receivables are not robust, the time to strengthen them is now.
Lapping: A Common Scheme
One prevalent form of receivables fraud is known as lapping. This maneuver involves diverting funds by applying receipts from one account to cover misappropriations from another. For instance, rather than crediting the payment to Customer A's account, a fraudster might pocket the funds and subsequently apply a payment from Customer B to Customer A's account, then Customer C's payment to Customer B's account, and so forth.
Unethical Write-offs and Discounts
Another popular tactic is the unethical write-off or discount. Instead of accurately crediting a customer's payment to their account, fraudsters may pocket the payment and manipulate the books by recording a fabricated bad debt write-off or discount. Despite the diversion of incoming payments, the customer's account will appear to have the anticipated current balance.
Detection and Prevention Strategies
In cases where receivables fraud is suspected, a forensic expert can conduct a meticulous examination. This involves tracing a selection of cash receipts to the sales ledger and deposit slips, aiming to uncover inconsistencies in dates, payee names, and amounts. Moreover, an expert might scrutinize deposit slips against the financial records and reach out to a sample of customers to confirm current balances and payment histories. During a fraud investigation, attention may also be directed towards accounts with unexplained credits, instances of increased customer credit limits, random adjustments to the accounts receivable ledger, and bad debt write-offs.
However, the optimal approach is to prevent receivables fraud from occurring in the first place. This involves the segregation of duties within the department. Ideally, the employee handling incoming payments should be distinct from the individual responsible for invoicing. It is also advisable to assign a separate employee to manage customer complaints, as an increase in complaints could indicate misappropriation of receivables. Additional safeguards include implementing mandatory vacation time and job rotation for all accounting staff.
The Role of Audits
Regular and surprise audits of your receivables operations can play a crucial role in both detecting ongoing fraud schemes and evaluating the effectiveness of your controls. These audits serve as a means to not only catch illicit activities but also to ensure that employees are adhering to established protocols.
In conclusion, protecting your accounts receivable department from fraudulent activities demands a proactive stance. By bolstering internal controls, segregating duties, conducting thorough audits, and maintaining a vigilant eye, businesses can substantially reduce their vulnerability to asset misappropriation schemes. Should you require guidance or assistance in fortifying your defenses against receivables fraud, please don't hesitate to reach out to us. Your financial security is our priority.
If you have any questions about this content, or if you would like more information about HoganTaylor’s Forensic, Valuation & Litigation Support practice, please contact Clay Glasgow, CPA, ABV, CFF, CFE , Advisory Partner.
INFORMATIONAL PURPOSE ONLY. This content is for informational purposes only. This content does not constitute professional advice and should not be relied upon by you or any third party, including to operate or promote your business, secure financing or capital in any form, obtain any regulatory or governmental approvals, or otherwise be used in connection with procuring services or other benefits from any entity. Before making any decision or taking any action, you should consult with professional advisors.