Avoiding Fraud

Clear Channel Outdoor took a $10 million charge during the fourth quarter of 2017 for accounting fraud in the company’s China subsidiary.  Some employees opened fake accounts in the company’s name and deposited advertising funds into those accounts.

This game can be played with payables as well.  Insider remembers a case of fraud from his banking days where someone in a company’s payables department set up a fake bank account in the name of a company’s biggest vendor and deposited checks supposedly written to the vendor into the account.  This fraud was discovered when the vendor called asking why $150,000 in invoices hadn’t been paid.

Small companies aren’t exempt from fraud issues.  Normally smaller companies have difficulty separating out functions and a few trusted employees end up with significant responsibility.  An accountant will tell you, that it is never “best practice” to have multiple key functions handled by one or two employees.

What’s the solution?

  • Separate the functions of approving an ad contract, recording the revenue and making deposits.  Fraud is harder if it includes more people.  If one person does everything it’s easy for them to fudge the accounting to hide their tracks.
  • Sign checks yourself or approve all large wires and electronic funds transfers yourself.
  • Make sure bank statements are reconciled monthly and you or your CFO review them.
  • Ask to see all the company’s checks and transfers each month and make sure all the employees know you are checking up on them.
  • Require two signature or approvals on a transaction over a minimum amount.  Fraud is harder when more people are involved.
  • Monitor receivables and payables balances closely.

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