How to Prevent Financial Statement Fraud

Jul 15, 2019 12:17:10 PM

Executives have to ask themselves "Are my numbers accurate?"  more and more every year as financial complexity increases. With an influx of fraud cases, it's no wonder CFOs and CPAs alike are finding it harder and harder to sleep at night.

The reality is that most fraud is committed by individuals within an organization, so executives have to take preventive steps to implement better controls. It is no longer up to the auditor to make sure that everything is accounted for. The organization itself is having to take on a lot more responsibility.

While there are cases of fraud in the news regarding large enterprises, small and mid-size companies are not immune. Luckily, there are preventative steps that you can take today to save your organization from falling victim to any of these financial fraud crimes. Enterprise Resource Planning (ERP) software, when implemented with a skilled ERP partner, can save your organization countless resources and headaches in the long run.

Here are some ways an ERP system can prevent financial fraud and set your company up for success:

1. Segregation of Duties

Your company becomes more at risk of fraud when your employees can complete end-to-end tasks. You can create accountability and oversight by merely ensuring that multiple employees are involved in all substantial financial processes. ERP systems are designed with strict approval mechanisms to promote segregation of duties (SOD). The system ensures that multiple employees see every transaction, therefore deterring fraudulent behavior.

However, the most crucial mistake you can make when setting up these controls within your ERP system is ignoring the issue altogether in the initial Envision and Design stages of your implementation. Experienced ERP partners will advise you to think about security on the front-end of a project to avoid substantial cost and effort in the long run. It is imperative to do your due diligence when selecting an ERP partner so that your organization is not left vulnerable to SOD conflicts.

2. Access Restriction

Access restrictions are an essential way to make sure that duties are segregated adequately. This means making sure that your employees are only able to see specific information and entities that their pay-grade allows. These restrictions make your system less vulnerable to fraud.

This may seem like a no-brainer, but there are two critical ways that inadequate access restrictions can fall through the cracks. The first is when an employee has administrative access to portions of your system that are too far above their clearance. For example, when an associate has managerial access by mistake. The second way that this can happen is when an employee gets a promotion. It's easy to remember to grant them higher access within your system, but deactivating their lower access is often forgotten. This can create a scenario in which this employee can initiate and approve significant financial transactions, thus creating a considerable SOD conflict.

Revising access restrictions within an ERP system is quick and seamless. You can easily set up access for individuals uniquely, or assign employees to groups with the same access. This standardization ensures that no employee has multiple security clearances and therefore decreases the probability of an SOD conflict.

3. Automated Alerts

A lack of accountability could be the tip of the iceberg when it comes to financial fraud. An ERP system can remove the possibility of employees manually making changes to significant financial statements without external notification. Automated email notifications are issued whenever significant changes occur. These notifications are completely customizable for your organization and its needs. A skilled ERP partner can help decide which notifications and controls are best for your company. This can serve as the last barrier of protection for your company against fraudulent behavior and could save you dollars and time in the future.

Reduce Vulnerability with an ERP system and an Experienced Partner

A dose of healthy caution and awareness of the vulnerability of your organization’s finances are essential. However, systems such as ERPs are here to reduce those vulnerabilities. Working with an experienced ERP partner for your implementation will ensure strong mechanisms are put in place to prevent fraud and allow you to find the correct solution for your organization.

Rand Group is a skilled ERP partner and has worked with hundreds of companies to design a security plan that works for them. To learn more about how we can work together to create a safe and secure financial system, contact us today. 

William Wu

Written by William Wu

William Wu is an Executive Vice President with over 16 years’ experience consulting for and performing ERP software implementations in the energy, technology, telecommunications, and service industries. With a background in both accounting and business and extensive certifications in ERP systems, William possesses both the drive and skill to move a company from where it is, to where it needs to be. Having dedicated more than 4,000 man hours of his own time to several individual projects over the course of his career, William is more than skilled – he’s a dedicated professional.

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