How can outsourcing of accounting functions reduce the risk of fraud?

When you outsource your business’s accounting and bookkeeping activities to an experienced firm of professionals, the benefits enjoyed by the company are enormous, monetary, and non-monetary. Outsourcing these needs can help you with ample time that can be further invested in your business’s core functions and making critical decisions using the financial intelligence shared by the outsourced consultants.

Under the circumstances where we employed an in-house team to carry out the accounting and bookkeeping activities, the possibility of fraudulent activities and manipulation of the books of accounts is relatively higher compared to outsourcing of these functions. The higher risk is owing to manual processes, control of the activities with a single individual, no maker-check concept, etc. Other factors impacting the risk intensity when an internal team is managing the primary task of accounting are the intent of the employees to earn extra beyond their salary or gain personal benefits using the resources of the company or, sometimes, the revenge-driven thoughts to adversely impact the company’s reputation to or to support the competitors for malicious considerations, etc.

Irrespective of reasons, business is always prone to a manipulative recording of transactions and irreversible damages when the entire range of activities about accounting and bookkeeping is in the hands of an individual or a group of people.

To answer your concerns about managing the business’s exposure to fraud, we are presenting herewith an article on how outsourcing the accounting needs of your business can help you mitigate this risk. Without further ado, let’s get started.

Best practices to reduce the risk of business fraud

Here are the best practices you can implement to reduce the overall contact with business deception in your daily business activities.

Control of all the activities with one person can adversely affect your business position. Thus, the separation of business-critical activities is significant. Mere splitting the activities into different sub-tasks and assigning the same to a different set of people is not sufficient to check on the controls and manipulation of transactions. Instead, such splitting of responsibilities should also be supported by an approach where an individual is unaware of the work being performed by his counterpart. Otherwise, these set of employees could gang up and materialize their ill-intentions.

Moreover, there has to be a preparer-reviewer approach in place, whereby an independent manager is appointed (who is not involved in the tasks being performed by his juniors) and would be supervising and reviewing the work carried out by his team.

Let us take an example of a small-sized business organization that is in the growing stage and has only a two-person team.

In such a case, the roles and responsibilities that can be assigned to a general manager can be as under-

Write, sign, and check emails.
Receive cash and record the transaction.
Record account receivables and account payables, and enter entries in general ledger accounts.
Check requests, authorize purchases, and prepare invoices.

While the owner of such an organization should retain the following responsibilities with himself to effectively control the operations-

Receive and review the bank statements and reconcile the same with utmost accuracy.
Prepare and process invoices from all the vendors.
Perform bank transfers.
Fill out the bank slips with perfection and make the deposits.
Sign the checks.
Managing the payroll.

A Chief Executive Officer is a showstopper for any business organization, expected to lead the business operations with optimal use of resources for the growth of the business. A CEO is known to bring new and better products to the industry or develop better ways to provide essential services and improve the market share/profitability of the company. CEO would be interested in overall planning and decision-making rather than getting involved in the routine business chores. Bookkeeping is not the only thing CEOs want to focus on and check whether every accounting entry made by the team is correct or not.

Involvement in the tasks related to accounting and bookkeeping often waste the CEO’s precious time, distracting their attention from business-critical aspects and adversely impacting the growth of the business. It may also build up frustration on the part of the CEO, impacting job satisfaction.

In such situations, the company’s CEO must determine the opportunity cost of diverting their valuable time and focus on something more critical to basic accounting and bookkeeping.

Companies resort to outsourcing their accounting and bookkeeping requirements to external expert firms to save on the CEO’s time and efforts towards the business’s core activities and planning.

What are the different types of frauds that can take place if you continue to rely upon an in-house team?

Business frauds can be of various types, and their intensity to damage the business varies from one company to another. Here, we have jotted down a few business risks arising from control of accounting and bookkeeping functions with an internal team.

When an employee of your organization alters or forges a cheque drawn in favor of the organization’s bank account to gain personal benefits, it is called cheque tampering. By outsourcing your accounting and bookkeeping requirements to third-party professionals, you can exponentially reduce the risk of cheque tampering as this external agency would not have access to the cheque but would be reconciling the bank receipts, clearance of the receivables, etc.

Suppose you do not wish to outsource and are a company of a two-person team. In that case, you can make one individual responsible for payments and another to look after the recording and reconcile receivables and incomes.

This type of fraud usually takes place in companies having a massive volume of transactions taking place in cash. The accounting department employees, who are responsible for managing the cash, personally pocket smaller portions of cash and record receipts of lesser cash in the books of accounts. This fraud can be eliminated if you start leveraging the power of automated payment transfer methodologies, diversion of cash management, and cash recording functions.

When the employees start playing with the time punching system to manipulate the in and out time, is when payroll fraud exists. The messing around with the punching time is done to fetch extra pay towards overtime. This fraud can dramatically impact your monetary resources when the size of workforce is enormous.

To avoid such payroll-related schemes in your business, it is recommended to outsource the payroll management functions to experts, as they have advanced technologies to cross-verify the actual working timings of each of your employees and ensure your company’s time punching system is not touched upon.

Billing fraud is usually referred to as the cheat trick where the employees of your company record bogus or forged invoices for purchases, creating fake accounts payables, which upon clearance would be credited to personal accounts. It also includes fake expense claims put by the employees to seek reimbursements from your company. These frauds occur in companies where the purchase invoices are not verified, or the reimbursement process is not subject to any authorization, resulting in a movement of bogus invoices in the company. In such cases, the actual need for and importance of outsourcing your accounting and bookkeeping functions becomes very pertinent.

Outsourced accounting service providers will cross-verify the invoices, using various techniques, whether the invoice is raised towards genuine purchases or put forth as part of expense reimbursement by the employees. In case of discrepancies, immediate notification of an error would be triggered, drawing your attention to such fraud and highlighting your action points, such as withholding the payments.

Final Words

In a real sense, various types and more severe frauds may occur in the company. These frauds have the potential to affect your brand name and cause a permanent impact on your company. To avoid such situations and let your business grow, you must outsource your accounting and bookkeeping requirements to experts like CFO UAE as a precautionary measure to mitigate these fraudulent activities.

How can outsourcing of accounting functions reduce the risk of fraud?