With a median loss of $766,000, financial misstatement schemes are the costliest type of fraud, according to “Occupational Fraud 2024: A Report to the Nations,” a study published by the Association of Certified Fraud Examiners. Fortunately, auditors and forensic accountants may be able to detect financial statement fraud by testing journal entries for errors and irregularities. Here’s what they look for and how these tests work.

Suspicious entries

Statement on Auditing Standards (SAS) No. 99, Consideration of Fraud in a Financial Statement Audit, provides valuable audit guidance that can be applied when investigating fraudulent financial statements. It notes that “material misstatements of financial statements due to fraud often involve the manipulation of the financial reporting by … recording inappropriate or unauthorized journal entries throughout the year or at period end.”

Financial misstatement comes in many forms. For example, out-of-period revenue can be recorded to inflate revenue — or checks can be held to hide current period expenses and boost earnings. Accounts payable can be understated by recording post-closing journal entries to income. Or expenses can be reclassified to reserves and intercompany accounts, thereby increasing earnings.

To detect these types of scams, SAS 99 requires financial statement auditors to:

• Learn about the entity’s financial reporting process and controls over journal entries and other entries,
• Identify and select journal entries and other adjustments for testing,
• Determine the timing of the testing,
• Compare journal entries to original source documents, such as invoices and purchase orders, and
• Interview individuals involved in the financial reporting process about inappropriate or unusual activity relating to the processing of journal entries or other adjustments.

Forensic accountants also follow audit guidelines when investigating allegations of financial misstatement. And financial statement auditors may call on these experts when they notice significant irregularities in a company’s financial records.

Testing procedures

AICPA Practice Alert 2003-02, Journal Entries and Other Adjustments, identifies several common denominators among fraudulent journal entries. Auditors will ask for access to the company’s accounting system to test journal entries made during the period for signs of fraud.

Specifically, they tend to scrutinize entries made:

• To unrelated, unusual, or seldom-used accounts,
• By individuals who typically don’t normally make journal entries,
• At the end of the period or as post-closing entries that have little or no explanation or description,
• Before or during the preparation of the financial statements without account numbers, and
• To accounts that contain transactions that are complex or unusual in nature and that have significant estimates and period-end adjustments.

Other red flags include adjustments for intercompany transfers and entries for amounts made just below the individual’s approval threshold or containing large, round dollar amounts.

Getting professional help

Financial misstatement can be costly, but your organization can take steps to minimize its risk. External financial statement audits, surprise audits, and forensic accounting investigations can help identify vulnerabilities and unearth anomalies. Contact us for more information, including how we use computer-assisted audit techniques to review accounting transactions.

There are currently more than 33 million small businesses in the United States, according to the U.S. Chamber of Commerce. To succeed in today’s competitive markets, it’s essential for your business organization to have accurate books and records.

Bookkeeping vs. Accounting

For starters, you should understand the distinction between bookkeeping and accounting. Bookkeeping refers to the systematic storing of financial documentation, such as receipts, purchase orders, and invoices, as well as recording of daily financial transactions, such as purchases and sales of goods and services. In general, bookkeeping is the basis for accounting. Bookkeepers record journal entries — that is, debits and credits — for each transaction using accounting software, such as QuickBooks®, NetSuite®, or Xero™. However, bookkeepers do more than data entry; they also may be responsible for sending invoices, processing payments and payroll, conducting banking activities, and reconciling accounts.

Accounting involves classifying, interpreting and communicating financial transactions. Accounting uses the records maintained by the bookkeeper throughout the period to generate historic and prospective financial statements. These reports — balance sheets, income statements and statements of cash flow — provide financial insights that help management and external stakeholders evaluate financial performance.

2 methods

Business owners must choose a method for recording and classifying financial transactions. There are two main options for small and midsize businesses:

1. Cash accounting. Under this simplified method, a business records revenue when cash is received and expenditures (such as expenses and asset purchases) when they’re paid.

2. Accrual accounting. This method is prescribed under U.S. Generally Accepted Accounting Principles. Here, revenue is recorded when earned, and expenses are recorded when incurred, without regard to when cash changes hands. It’s based on the principle that revenue should be “matched” to the related expenses incurred in the reporting period. The chart of accounts for an accrual-basis business includes such items as accounts receivable (invoices that have been sent but haven’t yet been paid by customers) and accounts payable (bills that have been received but haven’t yet been paid).

It’s important to choose one accounting method and stick with it as you record transactions (a bookkeeping function) and prepare your financial statements (an accounting function). Some organizations start with cash accounting and switch to accrual accounting as they grow.

Getting professional help

Complying with accounting rules, tax laws, and payroll regulations can be overwhelming for many closely held businesses. Fortunately, you don’t have to go it alone. We can help you set up and maintain a reliable system of reporting financial transactions in an accurate, timely manner. Contact us for more information.

When you hear the word “audit,” you might automatically associate it with financial reporting or the IRS. But auditing warehouse operations might also be beneficial for some businesses, such as manufacturers, distributors, and retailers. Awkward or repetitive movements by employees, oversized packages, and disorganized layouts can slow down productivity and even lead to medical and disability claims. Small adjustments can make a big difference in your bottom line. Here are some steps toward more efficient warehouse management.

Compute average cycle time 

Looking around the warehouse, you probably see a lot of people and products in motion. But don’t equate constant motion with efficiency. A closer inspection may reveal people and products waiting in queues due to blocked aisles, unavailable forklifts, or computer glitches. You may even find some workers wandering aimlessly for misplaced or hard-to-find items.

Improving efficiency starts by reviewing the order fulfillment process. How long does it take to process an order from start to finish? Your average cycle time is a critical benchmark. The goal is to find ways to reduce it by minimizing errors, wasted movements, congestion, and inefficient picking paths. Bottlenecks, idle workers, unused space, and piles of unattended inventory represent opportunities for improvement.

Make tangible enhancements

Once you’ve identified potential inefficiencies, you can put formal policies and procedures in place to reduce or eliminate them. Efficient warehouses have specific protocols for putting away shipments of new items, restocking returns, cleaning up messes, responding to accidents, and storing warehouse supplies and equipment.

Once those types of standard operating procedures are communicated to employees, focus on streamlining fulfillment. Examples of workflow improvements include:

• Rethinking floor, aisle, and rack layout to improve space utilization,
• Rearranging product locations so the most popular items are located in ground-level bins that are nearest to the packing stations and
• Redesigning signage to make it easier for pickers to identify aisles, racks, products, and workflow.

Consider asking your workers for suggestions. They may have some ideas that you haven’t thought of yet — plus, it helps with buy-in on any changes to your existing operating procedures.

After you’ve implemented improvements, measure your new and improved cycle time. Knowing how much you’ve shaved off the baseline metric can be a powerful motivational tool. Use it to drive continuous improvement.

Consider investing in more technology

Manual processes and outdated systems can cause errors and delays in fulfillment. So why not automate certain functions using technology? Bring your existing inventory management systems into the 21st century with upgrades, such as wireless mobile devices, radio frequency identification (RFID) technology, automated material handling equipment and voice-picking applications. Doing so can potentially speed up fulfillment, reduce errors and enhance customer satisfaction levels.

Before investing in a technology upgrade, it’s important to carefully weigh the costs vs. benefits. You’ll also need to evaluate compatibility issues with your existing accounting and resource planning systems. And don’t forget to train employees on how to use the technology; otherwise, you won’t reap all its potential benefits.

We can help

Sometimes objective outsiders can spot warehouse inefficiencies that company insiders overlook on a daily basis. Or they may be aware of improvements that other companies have successfully implemented. Contact us for guidance on best practices before auditing your warehouse.

When it comes to expense reporting, having rigorous financial controls is critical to operating a profitable business. You should monitor expenditures incurred by employees on behalf of the company. This enables your organization to track spending, control costs and maintain accurate financial records.

Establishing and adhering to strong policies, using technology correctly and complying with tax regulations are important ways to ensure accurate expense reports. Here are six tips to help your organization get a better handle on the expense management process.

1. Establish formal expense reporting policies.

It’s important to define allowable expenses and set spending limits for every employee. You should also stipulate the required documentation to accompany each expense reimbursement request. Communicate the policy to employees and have them acknowledge their compliance with every expense request they submit.

2. Set deadlines for submission.

Employees need to submit expense reimbursement requests in a timely manner. Regular submissions make it easier for employees to track and remember expenses. It also provides them with quicker reimbursements for out-of-pocket expenses.

3. Encourage or require the use of credit or debit cards.

Card transactions offer many benefits over cash payments. For instance, they create electronic transaction records and detailed statements for substantiation. Card usage also makes it easier for employees to separate their business and personal expenses, ensuring a more accurate and efficient expense reporting process. Many credit card companies offer potential rewards or cash back that the cardholder (either the employee or the business owner) can later redeem.

4. Require documentation and substantiation.

Employees should keep itemized receipts, including paper and digital receipts, and record the business purpose for each expense. For business meetings, this should include the purpose and the people who attended. Mileage logs must include similar details, such as the purpose of each trip and who traveled in the vehicle.

5. Leverage technology.

Expense reporting software can automate the receipt capture and expense categorization process and integrate with accounting reporting solutions. This streamlines the reporting process by reducing the paperwork an employee must manage and minimizing the need for manual data entry. It also improves accuracy in expense reporting and enhances compliance.

6. Audit your reporting processes.

Careful review of expense reimbursement requests can help identify compliance violations and detect potential fraud. Auditing transactions can also ensure sufficient documentation exists to comply with state and federal tax regulations.

An effective expense reimbursement process depends on policies, technology, and oversight. By adopting best practices, organizations can create a robust and efficient reporting process that promotes financial transparency and compliance. Contact us for help reviewing your existing expense reporting process and suggesting ways to improve it.

Reliable financial reporting is key to any company’s success. Here’s why your business should at least consider investing in audited financial statements.

Weighing the differences

Most businesses maintain an in-house accounting system to manage their financials. The documents your staff prepares through your in-house accounting system are called “internally prepared financial statements.”

In many cases, internal financials are perfectly functional for the day-to-day operational needs of a small business. But they usually don’t follow every reporting standard prescribed under U.S. Generally Accepted Accounting Principles (GAAP).

When an external CPA audits your financial statements, he or she will examine various accounting documents to check whether you’re following GAAP and, afterward, offer an opinion on your statements. If the auditor issues an “unqualified” opinion, he or she agrees with the methods your in-house team used to prepare your financial statements.

If a “qualified” opinion is issued, it usually means the auditor has identified one or more GAAP reporting methods that your company hasn’t followed. This doesn’t mean your financial statements are inaccurate; it just signifies that you didn’t prepare them according to GAAP. (There may be other reasons for a qualified opinion as well.)

Looking at both sides

Who cares whether you’re in compliance with GAAP? Lenders, investors, and other external stakeholders do. For example, banks may require you provide audited financial statements before they’ll approve loans, and sureties usually require them for bonding purposes. Some governmental agencies also require companies to provide audited statements to bid on contracts.

You may even save money. Small businesses with audited statements typically receive lower interest rates on loans than companies without audited statements. In addition, because of the extra steps an external auditor takes, audited financial statements are more likely than internally prepared statements to be free of reporting mistakes, such as data entry errors. For example, if your balance sheet shows that you bought a piece of equipment for $100,000, your auditor will double-check that figure by looking at original receipts.

Although audited financial statements can provide the benefits mentioned, they’re not something your business should leap into without foresight. In addition to requiring a financial investment, an outside audit will ask you and your employees to invest a substantial amount of time and energy toward its completion. You’ll need to gather and provide extensive documentation and even submit to interviews.

What’s right for your business?

If external stakeholders don’t require your company to provide audited financial statements, your CPA offers other lower-cost options, such as compiled or reviewed statements, which can help you gain insight into your company’s financial health. Contact us to determine what’s appropriate for your situation. If you decide you want an external audit of your financial statements, we’ll discuss timelines and responsibilities before fieldwork begins.