From invoices and payments to discounts and write-offs, many business transactions are recorded to accounts receivable. This makes receivables a popular fraud target. But your business doesn’t have to become a victim.
Receivables fraud occurs when dishonest employees divert customer payments for their personal use. They use various methods, including:
Lapping. This is the most common type of receivables fraud. It involves the application of receipts from one account to cover misappropriations from another. For example, rather than credit Customer A’s account for its payment, a dishonest employee pockets the funds and later posts a payment from Customer B to A’s account, Customer C’s payment to B’s account and so on.
Write-offs and discounts. Instead of crediting a payment to the customer’s account, fraudsters might pocket the funds and then record a bad debt write-off or discount to the customer’s account. Despite the diversion of incoming payments, the customer’s account will reflect the expected current balance.
Segregation of duties is critical to preventing receivables fraud. This means that the employee who handles incoming payments from customers should be different from the person who handles invoicing. Also consider assigning a different employee to manage customer complaints. Such complaints often increase when receivables fraud is occurring.
In addition, require mandatory vacation time for all employees. Receivables schemes typically require their perpetrators to remain vigilant — and in the office — to avoid detection. For this reason, it’s also advisable to rotate job duties among accounting staffers.
When receivables fraud is suspected, a forensic expert will use several methods to uncover illicit activities. For example, the expert might trace a sample of cash receipts to the sales ledger and deposit slips to find discrepancies in dates, payee names and amounts. The expert also may compare deposit slips against the books and send requests for confirmations to a sample of customers to verify current balances and payment histories. Other items that deserve scrutiny are:
- Bad debt write-offs,
- Accounts with unexplained credits,
- Increased customer credit limits, and
- Random adjustments to the accounts receivable ledger.
To identify perpetrators and find internal control weaknesses, experts often interview employees.
Even though fraud experts have methods of finding receivables fraud, it’s better for companies to stop these schemes before they start. Contact Cordia Partners to assist you with improving your accounting process in order to strengthen your business' internal controls.