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How Can Accounting Information Systems Aid in the Prevention of Fraud

 

Start Thinking Differently About Your Business

Fraud, embezzlement, hacking - common dangers for modern companies, that have only increased as the world became more digital. That's why companies employ IT consultants and network penetration testers (AKA 'ethical hackers'). Cybersecurity is of major importance for modern companies, both large and small.

While larger companies are able to afford experienced IT specialists and ethical hackers, smaller companies may need to rely on strong security tools and antivirus. In such cases, it helps to be able to compare premium antivirus software, which can be done on AntivirusRankings. It's certainly worth investing the time to find antivirus software which fits your business needs.

While hackers are a major threat in the modern era, financial fraud is a timeless crime. Ponzi schemes and embezzlement in particular are of concern, as numerous huge embezzlement cases and other financial frauds were brought to light in recent years.

  • Just last year, the acting head of Samsung in South Korea, Lee Jae-yong, was charged with bribery and embezzlement. It was reported he had funneled $36 million to political confidants. It was a tremendous national scandal, as it tied in with a corruption scandal that led to the impeachment of South Korea's president.
  • Another large case in 2018 saw Seth DePiano, a Fresno, California resident, sentenced to 12 years in prison for operating a large real estate Ponzi scheme. He had defrauded investors out of around $24 million, and was ordered to pay $19 million in restitution to the defrauded investors. Which almost sounds like he has a few million dollars waiting for him when he's released from prison.
  • And of course, mostly everyone is familiar with the story of Jordan Belfort, thanks to The Wolf of Wall Street starring Leonardo DiCaprio. Jordan Belfort's own book (which the movie is based on) implies several times that nearly every Wall Street firm is engaged in some type of corruption, Stratton Oakmont was just doing it the most extravagantly.

 

These are, of course, examples of extraordinarily high-profile cases.

 

Financial Fraud in Small Businesses

Entrepreneur reports that in fact, embezzlement occurs most often at small businesses. 80% of embezzlement occurs at businesses with less than 150 employees, and 30% of embezzlements involve losses of more than $500,000.

Furthermore, Bermuda-based insurance company, Hiscox, runs an annual "embezzlement study", to track common financial frauds and offer prevention tips. In their report, they noted it's not typically new, young employees most likely to steal from a company. In fact, it's the opposite. 56% of embezzlers were female, the average age around 49, and they are usually long-time employees. Furthermore, 40% of embezzlements occur in the finance and accounting departments - the departments responsible for identifying fraud!

accounting systems prevent fraud

 

Hiscox also reported that embezzlers usually display red flags, such as:

  • Wealthier lifestyles than what their salaries can provide.
  • Financial problems.
  • Unusually close relationships with customers and vendors.
  • Recent divorce and family problems.

 

After seeing these statistics, you might be wondering how accounting information systems can help prevent fraud, when fraud is typically happening in the accounting departments. That's where the necessity of strong managerial insight into accounting, and perhaps third-party consultations, comes into play.

 

How Accounting Information Systems Help Prevent Fraud

Accounting information systems offer a multitude of tools for management to be aware of what is happening, and not relying mainly on the accounting departments. With big data measurements found in accounting information systems, companies can track even minute details that will help in fraud prevention. For example, a company can use advanced inventory and tracking tools, and monitor inventory in real-time.

This allows inventory to be accounted for much more accurately, and irregularities to be discovered much sooner. And of course, anyone using the system leaves a digital footprint, which means embezzling employees can't simply alter records.

With enhanced real-time scrutiny, a company has overall stronger opportunities to identify even remote discrepancies. When a company is able to utilize technology in combination with quantitative analyses, and accounting information, the company is in a much better position to prevent fraud.

While accounting information systems are highly useful, company culture also plays a large role, according to the Anti-Fraud Collaboration. Fraud-resistant organizations often share three common traits:

  • An ethical culture coming from the top of the company.
  • A healthy dose of skepticism.
  • Engagement of all participants in the financial reporting supply chain.

 

More information can be found in their report, The Fraud-Resistant Organization.

 

How To Report Financial Fraud

Make your family and friends aware of this article by sharing it on social media. You can also officially report the scammers to the Federal Trade Commission using the link below:

Report To The FTC Here

 

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