Four antifraud controls are associated with at least a 50% reduction in both fraud loss and duration, according to “Occupational Fraud 2024: A Report to the Nations,” published by the Association of Certified Fraud Examiners (ACFE). They are financial statement audits, reporting hotlines, surprise audits, and proactive data analysis. However, the ACFE study also found that two of these — surprise audits and proactive data analysis — are among the least commonly implemented controls. Here’s how your organization might benefit from conducting periodic surprise audits.

Financial statement audits vs. surprise audits

Business owners and managers often dismiss the need for surprise audits, mistakenly assuming their annual financial statement audits provide sufficient coverage to detect and deter fraud among their employees. However, financial statement audits shouldn’t be relied upon as an organization’s primary antifraud mechanism.

By comparison, a surprise audit more closely examines the company’s internal controls that are intended to prevent and detect fraud. Such audits aim to identify any weaknesses that could make assets vulnerable and determine whether anyone has already exploited those weaknesses to misappropriate assets.

Auditors usually focus on particularly high-risk areas, such as cash, inventory, receivables, and sales. They show up unexpectedly, usually when the owners suspect foul play, or randomly as part of the company’s antifraud policies. In addition, an auditor might follow a different process or schedule than during an annual financial statement audit. For example, instead of beginning audit procedures with cash, the auditor might first scrutinize receivables or vendor invoices during a surprise audit.

The element of surprise is critical because most fraud perpetrators are constantly on guard. Announcing an upcoming audit or performing procedures in a predictable order gives wrongdoers time to cover their tracks by shredding (or creating false) documents, altering records or financial statements, or hiding evidence.

Big benefits

The 2024 ACFE study demonstrates the primary advantages of surprise audits: lower financial losses and reduced duration of schemes. The median loss for organizations that conduct surprise audits is $75,000, compared with a median loss of $200,000 for those organizations that don’t conduct them — a 63% difference. This discrepancy is no surprise in light of how much longer fraud schemes go undetected in organizations that fail to conduct surprise audits. The median duration in those organizations is 18 months, compared with only nine months for organizations that perform surprise audits.

Surprise audits can have a strong deterrent effect, too. Companies should state in their fraud policies that random tests will be conducted to ensure internal controls aren’t being circumvented. If this isn’t enough to deter would-be thieves or convince current perpetrators to abandon their schemes, simply seeing guilty co-workers get swept up in a surprise audit should help.

Despite these benefits, the 2024 ACFE study found that less than half (42%) of the victim organizations reported performing surprise audits. Moreover, only 17% of companies with fewer than 100 employees have implemented this antifraud control (compared to 49% of those with 100 or more employees).

We can help

Your organization can’t afford to be lax in its antifraud controls. The ACFE estimates that occupational fraud costs the typical organization 5% of its revenue annually, and the median loss caused by fraud is a whopping $145,000. If your organization hasn’t already conducted surprise audits, contact us to discuss how they can be used to fortify its defenses against occupational theft and financial misstatement.

 

 

Accurate bookkeeping is essential to operating a successful small business. The problems created by inadequate bookkeeping practices can have significant, long-lasting consequences. Here are four common pitfalls — and how to avoid them with the right knowledge and tools.

1. Commingled bank accounts

It’s important to maintain a separate dedicated bank account for business transactions. Using the owner’s personal accounts for business purposes can have legal and tax implications. Separate accounts also make it easier to track business expenses and prepare tax returns.

With a separate bank account, you can set up payments for recurring business expenses. It’s also important to review and reconcile your business records to bank statements on a regular basis.

2. Overreliance on spreadsheets

Excel is a user-friendly, versatile tool for many business purposes. But without extensive programming, it lacks automation and the ability to provide real-time updates. And using spreadsheets for bookkeeping purposes can lead to inconsistent treatment of similar transactions and data entry errors.

Excel should never be a substitute for dedicated accounting software, such as QuickBooks®, NetSuite® or Xero™. These cost-effective solutions streamline a small business’s financial reporting processes. Most programs integrate with bank and credit card accounts — and cloud-based platforms provide access from anywhere with the owner’s (or manager’s) laptop, tablet and smartphone.

3. The use of personal credit for business expenses

Drawing from personal credit sources provides quick access to funds when you’re launching a new venture. However, they often come with high interest rates and fees. Using personal credit for business expenses also makes it harder to separate personal and business expenses for accounting and tax purposes.

To get a business credit line, you’ll need to contact your bank and complete an application. While the application process may take some time, it’s worth the effort. Credit lines help establish a credit history in the company’s name, which is essential as the business grows and needs additional capital to purchase major assets and pursue investment opportunities.

4. Lax recordkeeping practices

Accountants dread when a small business owner shows up to tax preparation meetings with a shoebox of receipts — or no documentation at all. Well-prepared owners have organized records, including paper filing systems, digital storage, and backup solutions, to substantiate expenses for tax and accounting purposes.

By retaining original source documents — such as receipts, invoices, bank statements and contracts — you can track the business’s financial performance and file state and federal tax forms with ease. And you’re prepared if the IRS challenges any deductions or credits you claim for business-related items. Without source documents, the IRS is more likely to disallow business tax breaks and assess penalties and fines.

In general, business records must be retained for a period ranging from three to seven years, depending on the nature of the record. Contact us for specific record retention guidelines.

We can help

Implementing sound bookkeeping practices can empower you to improve your business’s financial management and increase confidence in your financial reporting. It reduces the stress of running a business and provides essential information for your business to thrive in today’s competitive markets. Contact us for help building a solid bookkeeping foundation.

Audit committees act as gatekeepers over the accounting and financial reporting processes, including the effectiveness of the company’s control environment. However, as the regulatory landscape becomes increasingly complex and organizations face evolving risks, the scope of an audit committee’s responsibilities may extend beyond traditional financial reporting.

Top-of-mind list

In March 2024, a survey entitled “Audit Committee Practices Report: Common Threads Across Audit Committees” was published by Deloitte and the Center for Audit Quality, an affiliate of the American Institute of Certified Public Accountants. The survey analyzed 266 responses, including many from people who served on audit committees of public companies.

Respondents identified the following five priorities over the next 12 months:

1. Cybersecurity. This was listed as a top-three concern by a majority (69%) of audit committee members surveyed. The focus on cybersecurity is, in part, caused by a new regulation from the U.S. Securities and Exchange Commission. It requires public companies to 1) report material cybersecurity incidents, 2) disclose cybersecurity risk management and strategy, and 3) explain their board and management oversight processes. Surprisingly, only 24% of respondents said their audit committees had sufficient levels of expertise in this area. So additional resources may be needed to hire external cybersecurity advisors or invest in educational programs to bridge the knowledge gap.
2. Enterprise risk management (ERM). Nearly half (48%) of respondents listed ERM as a top-three concern. This refers to the processes an organization uses to identify, monitor and assess enterprise-wide risks. Audit committees have been tasked with ERM for many years, but extra attention may be warranted as new threats emerge. Examples include pandemics, large natural and climate-related disasters, and global conflicts. It’s important for audit committees to evaluate whether their organizations’ ERM processes can handle new threats efficiently and effectively.
3. Finance and internal audit talent. More than one-third (37%) of respondents put this concern on their top-three list. Audit committees frequently work closely with in-house finance and internal audit teams. While most respondents (89%) agree or strongly agree that their internal auditors possess a high-level understanding of the companies’ operations, there may be opportunities to upskill in-house staff and use artificial intelligence (AI) to streamline routine tasks, eliminate redundancies, and identify opportunities to operate more efficiently. Audit committees should oversee succession planning for finance and internal audit teams, particularly if their companies’ CFOs are planning to retire soon.
4. Compliance with laws and regulations. More than one-third (36%) of respondents are focused on the heightened complexity of the regulatory environment. Compliance issues are especially prevalent in heavily regulated industries, such as banking, food services, and aviation.
5. Finance transformation. Listed as a top-three concern by 33% of respondents, finance transformation refers to revamping the finance department to better align with the company’s overall strategy. It may entail changes to the department’s operating model, staffing, processes, and accounting systems. The goals are to simplify, streamline, and optimize the organization’s finance function. Audit committees can help finance teams implement transformation initiatives by understanding the human and technological resources needed. Many are considering possible AI solutions, for example, to expedite closing the books at the end of the reporting period, improve financial planning and detect impending risks.

Collaborative approach

External auditors communicate frequently with audit committees about top concerns, emerging risks, impending regulations, and other matters so they can help each other in performing their respective roles. Contact us. We design audit procedures, draft financial statement disclosures, and provide guidance to help address the challenges audit committees face today.

Interim financial reporting is essential to running a successful business. When reviewing midyear financial reports, however, you should recognize their potential shortcomings. These reports might not be as reliable as year-end financials, unless a CPA prepares them or performs agreed-upon procedures on specific accounts.

Realize the diagnostic benefits

Monthly, quarterly and midyear financial reports can provide insight into trends and possible weaknesses. Reviewing interim results is particularly important if your business fell short of its financial objectives in 2023.

For example, you might compare year-to-date revenue for 2024 against 1) the same time period for 2023, or 2) your annual budget for 2024. If your business isn’t growing or achieving its goals, find out why. Perhaps you need to provide additional sales incentives, implement a new marketing campaign or adjust your pricing.
You can also review your gross margin [(revenue – cost of goods sold) ÷ revenue]. If your margin is slipping compared to 2023 or industry benchmarks, find out what’s going wrong and take corrective actions.

Don’t forget the balance sheet. Reviewing major categories of assets and liabilities can help detect working capital problems before they spiral out of control. For instance, a buildup of accounts receivable may signal collection problems. Or, if your company is drawing heavily on its line of credit, operations might not be generating sufficient cash flow.

Proceed with caution

If your company’s interim financial health seem out of whack, don’t panic. Some anomalies may not necessarily be related to problems in your daily business operations. Instead, they might be caused by informal accounting practices that are common midyear (but are corrected by your CPA at year-end). Remember that, unlike year-end reports, interim reports for private companies are seldom subject to an external audit or rigorous internal accounting scrutiny.

For example, some controllers might loosely interpret period “cutoffs” or use subjective estimates for certain account balances and expenses. In addition, interim financial statements typically exclude major year-end expenses, such as profit sharing and shareholder bonuses. As a result, interim financial statements tend to paint a rosier picture of a company’s performance than its year-end report may.

Furthermore, many companies perform time-consuming physical inventory counts exclusively at year-end. Therefore, the inventory amount shown on the interim balance sheet might be based solely on computer inventory schedules or, in some instances, the controller’s estimate using historic gross margins. Similarly, accounts receivable may be overstated because overworked controllers may lack time or personnel to adequately evaluate whether the interim balance contains any bad debts.

Finish the year strong

It’s hard to believe that 2024 is almost half over! Once your staff generates your business’s midyear financial health reports, contact us for help interpreting them. We can help you detect and correct potential problems. We also can help remedy any shortcomings by performing additional testing procedures on your interim financials — or preparing audited or reviewed midyear statements that conform to U.S. Generally Accepted Accounting Principles.

Many businesses focus on selling more products and services to boost profitability. But sales volume alone doesn’t necessarily raise profits. In fact, pushing more sales through a bloated expense structure can result in lower net profits.

That’s why it’s important to look at the other side of the ledger — expenses — as you aim to increase profits. A thoughtful way to cut expenses is to conduct a formal expense review. Here are four areas to focus your cost-cutting efforts on:

1. Labor costs. Evaluate your total employment costs. These include not only salaries and wages, but also employee benefits, such as health insurance and retirement plan contributions. Benefits account for more than one-third of total employee compensation, according to the U.S. Bureau of Labor Statistics.

In today’s tight job market, you want to offer competitive pay and benefits. So, it’s important to compare the total compensation paid for each position to what others in your industry are paying workers in similar roles. If your compensation is significantly higher or lower than these benchmarks, adjust accordingly. If you decide to reduce salaries or forgo raises this year, consider adding cost-effective benefits and perks that your workers might value — such as flexible work hours or employer-provided lunches — to help maintain morale and minimize turnover.

2. Vendor relationships. Gather all your vendor contracts so your management team can review them together. These may include contracts with suppliers, insurers, professional service providers, cleaners, landscaping companies, and technology firms. Determine if you’re paying for overlapping services from multiple vendors. If so, eliminate unnecessary vendors or services. Next, evaluate the services you’re purchasing from each vendor and how necessary they are. For instance, you might be paying a vendor to perform a service that your staff could do.

Finally, designate a preferred provider in each expense category and negotiate the best price with this vendor. Require employees to use preferred vendors unless there are extenuating circumstances that are approved by a manager. Also consider leases for equipment and property that could be renegotiated at more favorable terms.

3. Advertising. Work closely with your advertising agency to measure the effectiveness of your current campaigns. Some businesses waste thousands of dollars a month on ads that deliver little, if any, results. Your agency should be able to give you a good idea of the return on investment (ROI) of all your programs. Based on this analysis, reduce or eliminate spending on ineffective campaigns and consider diverting these funds to campaigns with stronger ROIs.

Also think about putting your advertising account out for bid if you haven’t done so in the past year or two. Many agencies automatically increase their rates annually, which can raise costs drastically after a few years. Tell your current agency that you’re shopping around and ask them to give you their best price. If you decide to switch to a new agency, you might benefit from fresh ideas and new perspectives on how to increase sales.

4. Interest. If your business borrows money for equipment, real property, or working capital needs, interest expense is probably a significant item on your income statement. Thanks to rising commercial interest rates, this expense has likely increased in recent years if you have variable-rate loans.

Your business operations should generate a higher return than the cost of your debt. If not, high-interest costs could lead to financial distress. To avoid this pitfall, brainstorm ways to lower borrowing costs.

For instance, you might be able to lower your interest rate by shopping around for loans with shorter terms or fixed rates (to hedge against further rate increases). Alternatively, you may need to draw less from your line of credit if you manage inventory and receivables more efficiently. Also, consider setting aside some operating cash to pay down your outstanding loans rather than taking dividends or paying bonuses.

Continuous improvement process

It pays to be cost-conscious. When reviewing the expense side of your operations, look at each expense line on your income statement to assess whether it’s reasonable. Every dollar of excess expense you slash should, in theory, drop straight to your bottom line. However, haphazard cost-cutting could impair future sales or productivity. So, cost-cutting requires a delicate balance.

 

Contact us for help performing a formal expense review to identify cuts that make sense for your business over the long run.