Your business depends on consistent cash flow, making accounts receivable one of its most important assets. Unfortunately, this asset is also a frequent target of dishonest employees because the process of receiving and recording payments can create opportunities for theft if proper safeguards aren’t in place. Regularly reviewing receivables processes and confirming that employees follow established controls can help reduce the risk of financial losses — and cash flow issues.

How it works

One of the best-known accounts receivable fraud schemes is lapping. In a lapping scheme, an employee steals a customer payment and conceals the theft by applying a later payment from another payer to the first payer’s account. The pattern continues as additional payments are shifted from one account to another so the records appear current. The books may seem accurate at first glance. But to remain hidden, the fraud scheme requires a constant flow of incoming payments.

Another common scam involves improper write-offs or unauthorized discounts. Rather than recording a customer’s payment, a dishonest worker diverts the funds and then reduces or eliminates the customer’s balance through an improper write-off, an unwarranted credit or an unauthorized discount. The customer’s account appears settled even though the payment is never deposited in the business’s bank account.

Watch for red flags

Certain activities and warning signs may indicate that your accounts receivable department warrants closer review, including:

• Unusual bad debt write-offs or customer credits,
• Frequent manual adjustments to receivable balances,
• Unexpected increases in customer credit limits,
• Deposit delays or discrepancies between receipts and bank records, and
• Customer complaints about payments that don’t appear on their accounts.

None of these issues automatically indicates fraud, but each deserves prompt investigation. If you suspect receivables fraud, contact a forensic accountant. This specialist can analyze payment records to determine whether customer receipts have been deposited and recorded correctly, and trace cash receipts to deposit records and the accounts receivable ledger.

Implement safeguards

Preventing receivables fraud begins with separating key responsibilities. When possible, employees who receive customer payments shouldn’t also record transactions or reconcile accounts. Dividing these duties makes it much more difficult for one individual to both commit and conceal a fraudulent act.

Other practical safeguards can further reduce risk. Assigning customer inquiries and payment disputes to someone outside your receivables function increases the likelihood that irregularities will be detected quickly. In addition, because fraud schemes generally depend on the perpetrator’s continuous oversight, you should require employees to take vacations. For the same reason, periodically rotate accounting responsibilities.

Routine internal reviews, combined with external and surprise audits, provide another layer of protection. These procedures can help uncover anomalies that might otherwise go unnoticed and assess whether established controls are followed consistently.

How forensic accountants can help

Accounts receivable fraud often develops gradually. The Association of Certified Fraud Examiners has consistently found that the sooner fraud schemes are uncovered, the lower the resulting losses will be. So early detection is essential.

(This is Blog Post #1968)