AuditMyBooks » Small Business Accounting Errors

Defense in Depth

admin — Thu, 01 Jul 2010 11:39:54 +0000

AuditMyBooks automatically analyzes small and medium business accounting records to detect errors and possible fraud.

Before AuditMyBooks, I spent 10+ years in the information security industry where defense in depth is a foundational concept. A formal definition goes something like… “defense in depth is an information assurance strategy in which multiple layers of defense are placed throughout an information technology system. It addresses security vulnerabilities in personnel, technology and operations for the duration of the system’s life cycle.” In plain English, it means don’t put all your eggs in one basket.

For example, maybe you’re one of those companies that spends thousands on security appliances every year, but doesn’t have a policy to disable user accounts when an employee leaves. You might have the best firewalls in the world, but they won’t do anything to protect against a disgruntled, former employee who can still use his password to gain access to your critical systems.

I was reminded of defense in depth while reading one of my favorite blogs recently. In this episode of Diary of a Bad, Bad Bookkeeper, the boss gives Betty Bookkeeper the signature stamp. You can probably figure out how this story unfolds… be sure to visit the blog if you want the full details. In the end, you’ll be reminded that “giving someone the keys to the kingdom” is a really bad idea. When you’ve failed to safeguard an asset like your identity, it doesn’t matter how much your spending on your accounting system. You are going to lose money.

Like a strong security system, an accounting system should include defense in depth to discourage fraud and reduce errors. For example, train your employees in fraud detection, and make it clear that integrity is expected. Put checks and balances in place, like separating check writing and signing. Develop an anonymous way for employees to report suspected fraud (3 times as many cases are caught by a tip than any other method.) And, make it a habit to periodically audit your QuickBooks data to identify problems.

Consider using a reporting or auditing tool to help you streamline the process, which means you’re more likely to do it regularly. Apps like AuditMyBooks can analyze your accounting transactions in QuickBooks to help you identify problems.

AuditMyBooks analyzes small and medium business accounting records to detect errors and possible fraud. Working with small business experts who have years of experience as ProAdvisors, Certified Public Accountants, Chief Financial Officers and Certified Fraud Examiners, we’ve identified more than 100 tests to detect errors and fraud. AuditMyBooks can be configured to meet the needs of all small businesses regardless of company size or industry. Unlike manual reviews of transaction logs which are time consuming, costly and rarely performed, AuditMyBooks automatically analyzes accounting records in a matter of minutes. You can use it daily, weekly, monthly … as often as you choose.

Interested in scanning your data?… check out our free trial today.

-CP Morey

True Story Round-up for June 29

admin — Tue, 29 Jun 2010 11:49:37 +0000

A true story round-up for June 29, 2010:

#1 comes to us from Montana where a Florence woman who embezzled $180,000 from a Missoula architecture firm was sentenced Tuesday to 10 years in the Montana State Prison, with eight years of the term suspended. What’s unique about this case is that she is required to pay back the $180,000 plus an additional $13,000 that was spent on the forensic investigation.

Our second story is an uncommon case where the thief was a bookkeeper at an accounting firm. She wrote checks to herself with funds from three clients of the firm totaling over $107,000 and used that money for personal expenses. And now for that all too common refrain, “at one time, the defendant was a trusted employee.”

#3 takes place in Indiana where a woman has been sentenced to 10 years in prison for falsifying checks and stealing more than $400,000 from a Wolcott grain company where she worked as a bookkeeper.

Our fourth story involves a former employee of a Ridgefield business consulting firm who appeared in court Thursday, charged with embezzling funds from the company. She had been stealing money since the “mid-eighties”, and like so many cases the owner was tipped off by someone outside the firm. In this case, it was AMEX.

Our last story for the round-up is the big money event. A bookkeeper for a Lexington law firm was sentenced to 51 months in prison on Friday for stealing nearly $2 million from the company… wow!

If you have stories to share, send them to truestories@auditmybooks.com. If we publish them, we’ll give you full credit and a link back to your site.

-CP Morey

Stealing is Centsless

admin — Thu, 24 Jun 2010 12:27:31 +0000

AuditMyBooks automatically analyzes small and medium business accounting records to detect errors and possible fraud.

When sharing stories about fraud and the techniques used to commit it, people are often surprised by the simplicity factor. I’ve joked that most small business fraudsters are more like Homer Simpson than Danny Ocean. When the owner is focused on running the business and the bookkeeper has too much leeway, it doesn’t take Ocean’s 11 style planning to commit the crime.

I’m going to share one of the simple tricks with you today. (Hopefully, this doesn’t turn into a how to session for a would-be fraudster!) Believe it or not, but people who commit fraud often create transactions with rounded amounts. In other words, they don’t have the sense to add the cents. Sorry, hard to resist.

Reviewing the accounting data for rounded amount payments is a common test used by fraud examiners, and there are many ways to get the job done. Assuming that you are working with a small data set, you could eye-ball it. The manual review is easy, just be careful of clerical errors and the time it takes to review the data regularly. An hour a month for a year is a day and a half of your time.

You can also use tools like Excel to sort and filter data. In fact, the MOD function is a useful feature for this type of analysis. If you want to further refine the analysis, you can even rank vendors by a percentage of rounded amount payments. Sort them in descending order to identify the most suspicious vendors first. One problem with this approach involves excluding legitimate transactions or vendors where rounded payments are normal. For example, the rent on your office is probably a rounded amount.

AuditMyBooks analyzes small and medium business accounting records for irregularities like rounded amount payments. It calculates each vendor’s percentage of rounded payments and allows you to easily exclude legitimate transactions or vendors from the analysis. In short, it works fast, is accurate every time and can be tuned to factors unique to your business.

Working with small business experts who have years of experience as ProAdvisors, Certified Public Accountants, Chief Financial Officers and Certified Fraud Examiners, we’ve identified more than 100 tests to detect errors and fraud. AuditMyBooks can be configured to meet the needs of all small businesses regardless of company size or industry. Unlike manual reviews of transaction logs which are time consuming, costly and rarely performed, AuditMyBooks automatically analyzes accounting records in a matter of minutes. You can use it daily, weekly, monthly … as often as you choose.

Interested in scanning your data?… check out our free trial today.

-CP Morey

AuditMyBooks automatically analyzes small and medium business accounting records to detect errors and possible fraud.

When sharing stories about fraud and the techniques used to commit it, people are often surprised by the simplicity factor. I’ve joked that most small business fraudsters are more like Homer Simpson than Danny Ocean. When the owner is focused on running the business and the bookkeeper has too much leeway, it doesn’t take Ocean’s 11 style planning to commit the crime.

I’m going to share one of the simple tricks with you today. (Hopefully, this doesn’t turn into a how to session for a would-be fraudster!) Believe it or not, but people who commit fraud often create transactions with rounded amounts. In other words, they don’t have the sense to add the cents. Sorry, hard to resist.

Reviewing the accounting data for rounded amount payments is a common test used by fraud examiners, and there are many ways to get the job done. Assuming that you are working with a small data set, you could eye-ball it. The manual review is easy, just be careful of clerical errors and the time it takes to review the data regularly. An hour a month for a year is a day and a half of your time.

You can also use tools like Excel to sort and filter data. In fact, the MOD function is a useful feature for this type of analysis. If you want to further refine the analysis, you can even rank vendors by a percentage of rounded amount payments. Sort them in descending order to identify the most suspicious vendors first. One problem with this approach involves excluding exclude legitimate transactions or vendors where rounded payments are normal. For example, the rent on your office is probably a rounded amount.

AuditMyBooks analyzes small and medium business accounting records for irregularities like rounded amount payments. It calculates each vendor’s percentage of rounded payments and allows you to easily exclude legitimate transactions or vendors from the analysis. In short, it works fast, is accurate every time and can be tuned to factors unique to your business.

Working with small business experts who have years of experience as ProAdvisors, Certified Public Accountants, Chief Financial Officers and Certified Fraud Examiners, we’ve identified more than 100 tests to detect errors and fraud. AuditMyBooks can be configured to meet the needs of all small businesses regardless of company size or industry. Unlike manual reviews of transaction logs which are time consuming, costly and rarely performed, AuditMyBooks automatically analyzes accounting records in a matter of minutes. You can use it daily, weekly, monthly … as often as you choose.

Interested in scanning your data?… check out our free trial today.

-CP Morey

True Story Round-up for June 22

admin — Tue, 22 Jun 2010 17:11:19 +0000

A true story round up for June 22, 2010:

#1 comes to us from Colorado where a former employee of Anderson Ranch Arts Center pleaded guilty Monday to embezzling hundreds of thousands of dollars from the nonprofit as part of a plea deal. The surprise in this story is that the accused is working as a bookkeeper at another company while she waits for her trial… REALLY?!?!?

#2 involves a bookkeeper in Maryland who embezzled more than $100,000 because, “she needed the money for her house.“ No problem, why didn’t you just say so… and what a surprise, the husband “had no idea”.

Back out west for #3 where a bookkeeper in Oregon was sentenced in a $742K embezzlement scheme with a tire company. The statute of limitations helped her in this case… too bad.

#4 takes place in West Virginia where for 12 years, a woman helped keep the Special Olympics’ finances in order and is now admitting to betrayal. Her $10,000 crime carries a $250,000 fine and 15 year sentence. Don’t Mess with Texas West Virginia.

The last story in today’s round up is from Indiana where a woman was arrested on 72 felony charges accusing her of forging more than $27,000 in checks while she was the bookkeeper. She worked with sewage… there are so many good jokes here… never mind!

If you have stories to share, send them to truestories@auditmybooks.com. If we publish them, we’ll give you full credit and a link back to your site.

-CP Morey

Diary of a Bad, Bad Bookkeeper by Betty Bookkeeper

admin — Fri, 18 Jun 2010 12:35:18 +0000

I recently discovered OneHourBookkeeper.com and E.T. Barton. I really enjoy her writing, especially a recent post about a really bad bookkeeper…

Another day, another dollar or at least, another stolen dollar.

Well, I have had my own company for about two weeks now and made a couple thousand dollars skimming off the deposits. The boss has not noticed. As far as he is concerned, all of the invoices are paid, and I am doing my job incredibly well. In fact, I just passed the three month trial period, and the boss gave me a $0.50 an hour raise. When he told me that, I felt like saying, “Really? A whole $0.50 an hour. You are too kind. Now I can buy that car I need.” But instead =>

Head over to One Hour Bookkeeper to see how the story ends! Then, come back to learn more about how AuditMyBooks looks for warning signs like possible bogus vendors and irregular payments to help you automatically detect errors and fraud.

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Happy Friday!

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-CP Morey

True Story Round-up for June 15

admin — Tue, 15 Jun 2010 16:35:29 +0000

A true story round up for June 15, 2010:

#1 comes to us from Wilmington, Delaware where the bookkeeper for a small business has been arrested for allegedly embezzling more than $83,000 from her employer. She used vendor payments to mask the embezzlement, but it eventually caught up with her.

#2 involves a repeat offender who pleaded guilty to $400,000 embezzlement in 2005, and is now facing a charge for writing $20,000 in bogus paychecks to her boyfriend. She told her co-workers that the company was sponsoring him as a professional bowler… clever!

#3 is a law firm theft. Anecdotally, I’ve noticed a lot of law firm cases which seems really reckless to me. Stealing from anyone can cause problems for you, but from a lawyer?

#4 is another high dollar theft. A bookkeeper for a small business in New Jersey stole $400,000 by writing checks to herself in her maiden name and failing to pay the company’s taxes. What’s unique about this case is that the criminal turned herself in before the investigation was completed. Still, the owner had to tap their retirement funds to cover the losses, keep the business running and keep the Internal Revenue Service at bay.

The 5^th story in our round-up shows that crime doesn’t pay whatever the reason may be. A bookkeeper accused of stealing nearly $70,000 tried to justify the crime as a result of her “desire to provide for her family” and because her “judgment was clouded at the time by a combination of medications”. They convicted her!

If you have stories to share, send them to truestories@auditmybooks.com. If we publish them, we’ll give you full credit and a link back to your site.

-CP Morey

Thoughts on 2010 Global Fraud Report

admin — Thu, 10 Jun 2010 16:35:50 +0000

The Association of Certified Fraud Examiners (ACFE) recently published the 2010 Global Fraud Report. For the first time since the study began in 1996, the ACFE included fraud data from around the world. As with previous reports, the 2010 Study is chock full of interesting stats on fraud and the cost it levies against business of all sizes. There is much to digest in the 84 page in-depth research report, for today’s blog I’ll highlight some of the more interesting bits I’ve read so far.

The ACFE estimates that the typical organization loses 5% of its annual revenue to fraud. Perhaps even more frightening is that few of these organizations ever recover the losses. When the money is gone, it’s gone… typically being spent on gambling, drugs, vacations, etc…. an extra 5% out the door with nothing to show for it in return.

More than 85% of fraudsters in the study had never been previously charged or convicted for a fraud-related offense. This often shows in the way frauds are committed. The usual techniques are pretty elementary in nature. Those unfamiliar with fraud are typically surprised when they hear about the bookkeeper who added her kids to the payroll.

As we’ve seen in previous reports, small organizations are disproportionately victimized by fraud. They lack many of the anti-fraud controls used by their larger counterparts, which makes them particularly vulnerable to fraud. Companies with fewer than 100 employees suffered the greatest percentage of frauds again in the 2010 study, accounting for more than 30% of the victim organizations. These same small businesses also suffer the highest median loss of all sized companies at $150,000 per occurrence in the U.S.

Besides reporting on the nature of fraud, the ACFE also makes recommendations on how to address this growing problem. One topic of particular interest to me is “surprise audits”. The ACFE says:

“While surprise audits can be useful in detecting fraud, their most important benefit is in preventing fraud by creating a perception of detection. Generally speaking, occupational fraud perpetrators only commit fraud if they believe they will not be caught. The threat of surprise audits increases employees’ perception that fraud will be detected and thus has a strong deterrent effect on potential fraudsters.”

Perhaps we need to order “Protected by AuditMyBooks” stickers for our clients…

True Story Round-up for June 8

admin — Tue, 08 Jun 2010 13:06:42 +0000

Back by popular demand, today’s blog entry spotlights recent fraud related news coverage from across the U.S. I’ve selected a Top 5. Prepare to be astounded!

#1 comes to us from the Eugene, Oregon area where a woman is accused in a lawsuit of embezzling well over $1 million from her longtime employer. Sure the dollar value of this fraud catches your eye, however, the point I found particularly interesting was that the company anticipates being required to pay back taxes and penalties to the IRS as a consequence of the embezzlement. Wow! First they lose the money to the bookkeeper, and now they pay taxes on the understated revenue which they will never get back.

#2 is from the State of NY where a former bookkeeper pleaded not guilty to a 15- count indictment accusing her of stealing more than $3,000. I liked the go-for-the-throat attitude of the owners in this story. I’m sure the alleged would love to get a cash advance on her Visa and make this all go away.

The setting from #3 is New Jersey where a bookkeeper who stole $400,000 from her employer has been sentenced to six years in state prison. In this case, the bookkeeper was ordered to pay a full restitution. Not only is that uncommon, but it’s also alot of license plates.

#4 takes us back to NY where a former law office bookkeeper shed tears as she learned her fate for pocketing more than a half-million dollars from employers who trusted her. The shocker for this story is the plural form of “employer”. That’s right, she stole money from TWO different firms.

For the last in our Top 5, we head back to the West coast. A former employee at Superior Tire Service was sentenced Tuesday to more than nine years in prison for embezzling more than $700,000 from the company during the course of 10 years. As a CPA, I like how they bottom line the loss in this story explaining that “Superior Tire Service’s more than 145 employees lost benefits and pay raises because of the theft… her greed cost about $8,000 per employee”.

If you have stories to share, send them to truestories@auditmybooks.com. If we publish them, we’ll give you full credit and a link back to your site.

-CP Morey

Paid for the Same Thing Twice?

admin — Tue, 25 May 2010 14:02:25 +0000

AuditMyBooks automatically analyzes small and medium business accounting records to detect errors and possible fraud.

Despite mentioning errors before fraud in most of our copy, it seems we often focus on the later. I suppose it has something to do with CSI airing 3 nights a week. Everyone loves a good “whodunit”, and the stories behind most fraud cases usually don’t disappoint.

While I doubt we’ll be seeing any shows next season with plotlines based on accounting errors, we shouldn’t treat them as secondary to fraud. From an economic standpoint accounting errors can be quite interesting, especially when considering the opportunity for financial recovery.

Take duplicate payments as an example. In most cases they are not fraud related, but can represent a significant financial loss. Experts estimate that as much as 2% of payments are duplicated. Assuming you process $1 million in A/P invoices means you could be losing as much as $20,000 per year. To make matters worse, assume you’re running a company that makes 10 cents on the dollar. A $20,000 expense leak requires $200,000 in new sales to offset it. Accounting errors are suddenly pretty interesting.

Accounting software packages usually have some controls related to duplicate invoices, but there are still ways to make mistakes. Write a check to a vendor on Monday and process the same transaction as a vendor invoice on Wednesday, and you’re on your way. There are several “opportunities” to make the mistake.

There are solutions to the A/P leakage problem. Last week I attended a training session hosted by an enterprise software company called IDEA. Duplicate payments was one of the examples the instructor used to illustrate the value of the application. ACL is another application that can be used to identify leakage. Like IDEA, ACL is geared towards large companies or accounting professionals with specialized training.

AuditMyBooks automatically analyzes small and medium business accounting records for mistakes like duplicate payments. Working with small business experts who have years of experience as ProAdvisors, Certified Public Accountants, Chief Financial Officers and Certified Fraud Examiners, we’ve identified more than 100 tests to detect errors and fraud. AuditMyBooks can be configured to meet the needs of all small businesses regardless of company size or industry. Unlike manual reviews of transaction logs which are time consuming, costly and rarely performed, AuditMyBooks automatically analyzes accounting records in a matter of minutes. You can use it daily, weekly, monthly … as often as you choose.

One of our beta users found a duplicate payment a few weeks ago. Interested in scanning your data… check out our free trial today.

-CP Morey

Grow Your Business While Protecting Clients from Errors and Fraud

admin — Thu, 20 May 2010 21:12:51 +0000

Next week I’ll be presenting a session at Scaling New Heights. The topic is how to grow your business while protecting clients from errors & fraud. Considering that almost half of all fraud in the U.S. is committed at companies with less than 100 employees, I think the topic is very relevant for the Intuit QuickBooks ProAdvisors and Solution Providers attending the event.

I’m presenting an overview of the “how’s” in today’s blog.

1. Extending the life of QuickBooks – is an interesting angle and one… admittedly… I didn’t think of myself. I heard a similar story when talking to two different ProAdvisors recently. One explained that he “doesn’t recommend QuickBooks unless it’s an owner/operator scenario”, while another said she “sometimes has to migrate clients to other systems when they have outgrown QuickBooks.”

They both also recognized that AuditMyBooks could be useful to “extend the life of QuickBooks” because it adds some level of internal control that doesn’t exist natively. Some clients may still eventually outgrow QuickBooks, but keeping them on a platform that you’ve invested in learning… if even for an extra year or two… is valuable to you and your client.

2. What am I getting into? – is another interesting “how”. AuditMyBooks is useful as diagnostic before visiting an existing client or submitting a proposal to a new prospect. In either case, AuditMyBooks provides a quick, automated assessment to support the assertion that “the books are in great shape”. Rather than taking their word for it, AuditMyBooks offers visibility into the “true” state of the books which helps to avoid underbidding an engagement with an existing client or new prospect.

3. New services – is perhaps the most obvious answer for how to grow your business while protecting clients from errors & fraud. The AICPA recently reported that nearly 70% of all CPA firms are creating or enhancing their forensic practices. While fraud is always present, the sour economy has worsened the problem as cash-strapped employees resort to theft as a means of supporting lifestyles backed by overextended credit. AuditMyBooks offers a number of new service opportunities for CPA’s, CFE’s, ProAdvisors and other financial professionals serving small businesses. The new services can include set-up and tuning, ongoing transaction monitoring and even “emergency response” in the unfortunate case when a fraud is discovered.

There are two other options worth mentioning, certification and “rule recipes”. We’ll be launching an AuditMyBooks Certification this summer. While the program details are still being defined, we’ve discussed a “train the trainer” scenario where we will invest in training a select group of ProAdvisors, who may then choose to offer AuditMyBooks Certification classes to other ProAdvisors. These classes could be offered for a fee. AuditMyBooks allows you to customize the rules that detect irregularities, and some users have recognized how rules could be customized for factors like a client’s industry. In this scenario, a ProAdvisor with deep retail experience could create configuration templates… “rule recipes”… that leverage their industry expertise. These templates could be sold to other ProAdvisors.

AuditMyBooks is a great way CPA’s, CFE’s, ProAdvisors or financial professionals to expand their services to include enhanced protection from a serious problem facing millions of small businesses. If you are interested in this topic, let’s talk.

-CP Morey

Predicting Fraud in Small Businesses (Wrap-up)

admin — Tue, 18 May 2010 19:44:30 +0000

Last week, I spoke at the Fourth Annual Fraud & Forensic Accounting Conference in Atlanta. Thanks to all who attended the session, provided examples of real-world fraud cases and asked insightful questions. If you missed the event, the theme of my presentation was Predicting Fraud in Small Business. Given that small businesses suffer a large proportionate share of the total burden when it comes to occupational fraud, I posed the question, “What if fraud could be predicted?” I blogged about this topic last week, specifically addressing “why are small businesses so susceptible to fraud” and “solutions available to address the issue of errors and fraud“. In this wrap-up post, I’ll offer some insights on how fraud might actually be predicted.

Mr. Marks, by mandate of the District of Columbia Precrime Division, I’m placing you under arrest for the future murder of Sarah Marks & Donald Dubin that was to take place today, April 22 at 0800 hours & four minutes. – Chief John Anderton (from the movie Minority Report)

In reality, the notion of predicting errors and fraud is not as far-fetched as you may think. In fact, predictive analytics are used to address similar problems today. The best recognized example may come from the field of consumer finance where characteristics like payment history and credit utilization are used to assess the likelihood of a person defaulting on a mortgage or credit card agreement. A credit score is a number representing the creditworthiness of a person or the likelihood that person will pay their debts. It has shown to be quite predictive of risk which has helped to lower the cost of providing credit while making credit more widely available to consumers.

With this example in mind, consider how the same methods applied to different data may serve in identifying small companies that are at risk for errors and fraud. Much like payment history is an indicator of creditworthiness, characteristics like industry classification or transaction volume may be useful to predict the likelihood of financial irregularities. Take even further, an index based on error and fraud data could even be used to benchmark a company against it’s peers, similar to how FICO scores are used to measure a person’s creditworthiness.

The concept is really about finding that “ounce of prevention”, as the ability to detect errors and fraud using predictive techniques could provide benefit to the millions of small businesses fueling the U.S. economy. It’s also the nature of a research project AuditMyBooks is about to launch with the support of the National Science Foundation. If you are interested in the topic, I’d love to hear from you.

- CP Morey

Predicting Fraud in Small Businesses (Part 2)

admin — Thu, 13 May 2010 12:53:36 +0000

Tomorrow, I’ll be speaking at the Fourth Annual Fraud & Forensic Accounting Conference in Atlanta. The theme of my presentation is Predicting Fraud in Small Business. Given that small businesses suffer a large proportionate share of the total burden when it comes to occupational fraud, I’ll pose the question, “What if fraud could be predicted?” We’ll talk about some really exciting research underway by AuditMyBooks, Kennesaw State University and the National Science Foundation… more on that later.

In Tuesday’s blog, I outlined four factors that make small businesses susceptible to fraud: Experience, Optimism, Simplicity and Cost. Today, I’ll provide a short survey of solutions available to address the issue of errors and fraud. I’ll cover this material in greater depth during my presentation tomorrow. I hope to see you at the event.

While accounting systems generally include control mechanisms to reduce errors and fraud, applications designed for small businesses are prone to these issues because they emphasize ease of use over strict adherence to process. While larger organizations typically test internal controls periodically via audits or reviews, small businesses rarely conduct these procedures due to the associated cost and complexity.

Although possible, manually reviewing transaction log files is uncommon among small business owners because it is time consuming and requires an in depth understanding of accounting standards. Even if they are employed as techniques by bookkeepers or financial service providers, manual reviews are error prone, inefficient and only as current as the date they were performed. To put a finer point on it, we compared the time required to complete a one-time manual review to the time required to complete a routine scan with AuditMyBooks. Using an average sized QuickBooks file, a manual review of all transactions using the same techniques employed by AuditMyBooks would take approximately 45 hours. The same analysis can be completed with AuditMyBooks in less than 10 minutes. Assuming your time is worth even $50 per hour results in a significant Return on Investment for the AuditMyBooks subscription.

Continuous Controls Monitoring is an emerging technology that is focused on very large public companies and government entities (e.g. Department of Defense). Their primary use is to monitor systems for procedural and regulatory compliance. Solutions from companies like Oversight Systems, Approva and Lumigent, while highly effective for error and fraud detection, are too costly and complex for small businesses.

Financial audits are useful techniques to identify errors, fraud and other accounting issues. They are often required for firms, particularly those that are publicly traded or those with debt financing. Unfortunately for small businesses, the cost and time commitments needed to conduct even an annual audit are prohibitive. A large, regional CPA firm with 1,000’s of small business clients offered an interesting anecdote recently stating that “less than 1% of their small business clients are audited”. Fraud and error detection is also possible with Forensic and Business Intelligence applications. Although like financial audits, they are typically only used by large organizations.

AuditMyBooks was built to address the opportunity that sits between a very serious problem faced by small businesses (i.e. errors and fraud) and the lack of solutions right-sized for this segment of the market. AuditMyBooks can be configured to meet the needs of all small businesses regardless of company size or industry. Unlike manual reviews of transaction logs which are time consuming, costly and rarely performed, AuditMyBooks automatically assesses every accounting transaction in a matter of minutes to identify irregularities. Since the subscription includes unlimited scans, businesses can use AuditMyBooks as often as they like… monthly, weekly, daily, etc. The sooner errors and possible fraudulent transactions are discovered, the sooner corrective action can be taken. More regular diligence reduces risk to every business especially since AuditMyBooks provides the information necessary to quickly take corrective measures, ultimately helping you to focus on business success and growth.

Stay tuned for next week’s wrap-up of the Fourth Annual Fraud & Forensic Accounting Conference.

-CP Morey

Predicting Fraud in Small Businesses (Part 1)

admin — Tue, 11 May 2010 16:16:34 +0000

Later this week, I’ll be speaking at the Fourth Annual Fraud & Forensic Accounting Conference in Atlanta.   The theme of my presentation is Predicting Fraud in Small Business. Given that small businesses suffer a large proportionate share of the total burden when it comes to occupational fraud, I’ll pose the question, “What if fraud could be predicted?”   We’ll talk about some really exciting research underway by AuditMyBooks, Kennesaw State University and the National Science Foundation… more on that later.

First, let’s take a small step back… before we get to the “Minority Report” type discussion. In preparing my presentation, I thought about the countless stories we’ve heard… stories about small business victimized by fraud. We’ve featured many of these stories in our blog over the last several months. One question that continued to jump out to me is… why are small businesses so susceptible to fraud?

I’ll address this question in my presentation on Friday… I hope to see you at the event… but also thought it would be interesting to present in our blog… so here we go…

It really boils down to 4 factors:

1. Experience. Most small business owners know their craft… plumbing, cake making, welding, wedding planning… but not accounting. They bring in an outsider to help. In the best case, the outsider is trustworthy and knowledgeable, the owner gets a clean set of books, assets are protected and everyone goes home happy. In far too many cases, the outsider has devious plans and knows exactly how to cover his/her tracks. This is why organizations like the Association of Certified Fraud Examiners claim that, on average, a small business owner learns about fraud 18 months after it starts and is generally notified by someone outside of the company. To put it in simple terms, they don’t know what they don’t know.

2. Optimism. Have you ever met a small business owner who wasn’t an optimist? OK, let me rephrase. Have you ever met a successful small business owner who wasn’t an optimist? As I’ve studied the real life cases of fraud in small business, a few patterns have emerged.   Here’s one… the owner almost always says something like, “I can’t believe she stole from us. She was like one of the family.” I’ve heard it and read it time and time again.   My take is that most successful small business owners have such a positive outlook and are so genuinely excited about what they are doing, that they cannot recognize when someone inside their beloved company has evil intentions.

3. Simplicity. Small business accounting applications are simple by design.   Intuit’s QuickBooks is wildly successful because you don’t need degree in accounting or a CPA to use it. The trade-off is that it also lacks many of the internal controls common in more sophisticated accounting applications used by much larger companies. On a related note, while large companies have staffs big enough to enable separation of duties, few small companies have the same resources. In fact, with some small companies the accountant is also the receiving clerk and office manager.

4. Cost. In our current economic environment some like to say that cost cutting is back in style. The fact is, with small businesses, it never went out of style. Unfortunately, when it comes to accounting, many owners view it as a necessary evil… an extra cost. As a CPA, as much as I’d like to improve internal controls or take a closer look at the books, it just doesn’t rank high relative to other priorities that drive new revenue. The flip side of this argument is simple though… if you don’t look for fraud & errors, you won’t find them… at least not soon enough to make a difference.

Of course, that’s a premise on which AuditMyBooks was built. Unlike manual reviews of transaction logs which are costly, time consuming and rarely performed, AuditMyBooks automatically assesses every accounting transaction in a matter of minutes to identify irregularities.   The sooner these issues are discovered, the sooner corrective action can be taken. More regular diligence reduces risk to every business especially since AuditMyBooks provides the information necessary to quickly take corrective measures, ultimately helping you to focus on business success and growth.

Stay tuned for Part 2 in the series… and I hope to see you at the Fourth Annual Fraud & Forensic Accounting Conference.

-CP Morey

Unlike manual reviews of transaction logs which are costly, time consuming and rarely performed, AuditMyBooks automatically assesses every accounting transaction in a matter of minutes to identify irregularities. The sooner these issues are discovered, the sooner corrective action can be taken. More regular diligence reduces risk to every business especially since AuditMyBooks provides the information necessary to quickly take corrective measures, ultimately helping Atlanta Professional Accounting and its clients to focus on business success and growth.