Sunday, March 21, 2010

Bad Debt Policy

Policies are an important part of any organisation. One of the policies needed is a Bad Debt Policy which provides details of when a debt should be written off. It also provides details of how the write off process needs to be authorised. So how does this help with fraud prevention?

A common method to hide a fraud is to take funds as they are received and to record them in the accounts as a debtor. As the debtor gets larger and is seen not to be being collected, it is written off, thereby reducing the risk of the fraud being discovered. This is especially a problem for organisations that are regularly owed funds from clients or other customers which do not pay and there is a history of writing off the debt.

When preparing a Bad Debt Policy, you need to clearly set out the criteria of when a debt is to be written off as well as how the write off is to be authorised. It is the authorisation process that should pick up potential fraud.

Sunday, March 7, 2010

Budgeting as a tool to reduce fraud

Budgets should be a part of any organisations.  What a lot of people do not realise is that the budgeting process is a useful tool in the fight against fraud.  For example, the comparison of actual results to budgets may show discrepancies in spending which when investigated may show significant over spending which has not been approved.
But to enable reliable comparisons of actual results to budgets, the preparation of budgets need to be undertaken with care. Hints on developing budgets are:
  • It doesn’t matter how big or small your organisation is. It should still have a budget;
  • Go back to last year’s budget (if there is one) and see how accurate it was compared to actual results;
  • Go back to last year’s actual results and determine when income was received (eg. was it seasonal) and when expenses were incurred (eg. are there a number of expenses that are paid once a year?);
  • If there are new programs or expenditures that are to be included, have that relevant person or department prepare a detailed “mini budget” to be included in the budget;
  • Determine if there are new events that may affect the budget (eg. capital expenditure);
  • Make sure the board sign off on the budget after having thoroughly reviewed the budget.
To reduce fraud, the budget needs to be accurate. If you find that the budget is starting to have significant variances from the budget, it may be necessary to restate the budget. It is these variances that may show fraud is occurring and if variances are common place, fraud may be missed.