When businesses rapidly grow, their accounting oversight often does not keep pace as executives and team members focus on driving the business forward rather than back-office functions.
Growth stage businesses often rely on one person who can collect and deposit checks, invoice customers and reconcile the bank account, and also manage and prepare the financial statements. When these duties are not separated, these businesses leave themselves vulnerable to finance and accounting fraud.
Rather than committing time and resources to hiring a team and building out these processes in-house, outsourcing finance and accounting functions is a quicker and more cost effective method of establishing robust internal controls to mitigate this risk and separate finance and accounting duties.
What are Internal Accounting Controls?
Internal controls in the finance function are the processes and systems put in place to ensure the integrity of financial and accounting information, promote accountability, and prevent fraud.
Internal controls fall under three major categories:
Control Type | Preventive Controls Aim to deter errors or fraud that could result in costly financial misstatements. |
Detective Controls Detect and identify errors or fraud that have already occurred. |
Corrective Controls Address identified errors or irregularities. |
Examples | -Separation of duties -Controlled access to accounting systems -Double-entry accounting -Expense verification |
-Regular audits -Reconciliations -Inventory and cash counts |
-Adjustment entries -Policy updates -Ledger verification -Physical audits of assets |
Why Are Internal Controls Important?
Proper controls are important for three major functions:
- Fraud Prevention: Reduces the opportunities for fraud by segregating duties and implementing authorization protocols.
- Operational Efficiency: Enhances the accuracy and timeliness of financial reporting, which improves decision-making.
- Regulatory Compliance: Helps ensure compliance with laws and regulations, reducing the risk of legal penalties.
While these functions are critical, the cost to develop them can be significant for less mature companies, which include purchasing accounting software and hiring and training multiple accounting professionals.
According to our research on traditional accounting costs, the median accounting salary is roughly $70,000 per year, while more junior roles (bookkeepers, accounting and audit clerks) command about $40,000 annually.
Factoring in the average cost to train new hires around $4,000 per employee, developing internal accounting controls in-house can quickly become expensive and time-consuming. Instead, third-party finance and accounting experts can expedite establishing accounting oversight.
Preventive Controls: How an Outsourcing Partner Helps Deter Fraud
Outsourcing partners can significantly enhance the implementation and effectiveness of preventive internal controls to deter incidents of fraud.
Separating Duties
Leaving one person responsible for the three primary accounting functions (record keeping, authorization, and custody of assets) is a recipe for unchecked errors or possible fraud.
An outsourcing partner can provide additional personnel to distribute financial responsibilities, ensuring that no single person controls all aspects of a transaction.
Controlled Access
A common scenario for growing companies is relying on one employee with QuickBooks experience to manage the books. Granting a single person access to a firm’s accounting software, or if access is otherwise uncontrolled, can lead to data breaches, theft, or manipulation of financial records.
Capable F&A partners should have robust security measures and technology platforms that limit access to accounting software and sensitive information for authorized users, reinforcing data security.
Double-Entry Accounting and Expense Verification
Requiring documentation and approval for expenses ensures that all disbursements are legitimate and necessary. Absence of verification can lead to personal or inappropriate expenditures being unnoticed and reimbursed.
Outsourcing teams use standardized procedures, accounting best practices, and automated systems to ensure accuracy and compliance in accounting entries and expense reporting.
Detective Controls: How Third-Parties Help Uncover Fraud
Third-party F&A teams provide rigorous oversight and independent verification, helping to uncover and rectify discrepancies in financial data.
Regular Audits
Periodic independent reviews help ensure that financial records are accurate and that a company complies with regulatory standards. Without them, ongoing errors or fraudulent activities may go undetected, compounding the financial impact over time.
Outsourcing partners can conduct independent and unbiased audits to provide an external check on company finances.
Reconciliations
Regular matching of accounts with actual transactions verifies that all transactions are recorded and are accurate. Discrepancies might not be identified quickly, leading to financial losses or erroneous financial reporting.
Third-party F&A partners provide reconciliation support to collectively enhance the reliability of financial reporting and reduce the likelihood of fraud, ultimately reducing overall F&A spending and protecting the assets and reputation of the business.
Surprise Cash Counts
They can manage and perform scheduled and unscheduled inventory and cash counts, adding an extra layer of verification.
Corrective Controls: How Outsourcing Helps Address Fraud
Outsourcing firms have specialized expertise to recommend corrective measures that ensure swift resolution of identified financial discrepancies and reinforcing policy adherence.
Adjustment Entries and Policy Updates
Outsourcing firms can make necessary ledger adjustments and help update internal policies based on the latest compliance standards.
Physical Audits of Assets
They can also recommend physical asset audits to ensure assets are accounted for and valued correctly.
Fraud Examples
Accounting fraud comes in many forms, these are the most common examples and how they occur.
Check Tampering Fraud
Tampering fraud is when an employee alters, forges, or intercepts a check drawn on your business’ bank account. The four types of check tampering are:
- Altered checks (changing the payee),
- Concealed checks (the signer failed sign a check that was hidden in a batch)
- Forged checks (forging the check signature)
- Authorized maker (misappropriation of funds by the signer)
To separate accounting duties, such as bank reconciliation and data entry, you can outsource for an additional accounting person or service who will perform all the necessary audits to check for fraud.
Billing Fraud
When an employee submits invoices for fake goods and services or personal invoices for the company for payment, it’s called billing fraud. It’s one of the most common types of fraud which happens when the accounting duties, such as bill payment and bill reconciliation, aren’t separated.
Payroll Fraud
Payroll frauds happen when an employee issues payment to fictitious workers or inflates their working hours on their timesheet. It’s less likely to occur in larger organizations because they outsource payroll due to the function’s complexity. Luckily, there are automated billing systems and fraud detection tools (offered by banks) to which you can safely outsource payroll.
Skimming Fraud
The term “skimming” means taking something off the top. The cash is skimmed by the employee responsible for the cash receipts, and it’s a typical scenario in organizations that continue to receive cash payments. The fraudster takes the money and deletes the entire transaction or reports a lower cash total. By hiring someone to run an audit trail, they can detect that something was deleted in your business’ cash account.
Get Enterprise-level Internal Accounting Controls with Consero
Executives would prefer to focus on growth initiatives rather than time consuming and tedious daily accounting tasks. But when fraud happens, they’d wish to have been there to check the numbers from time to time. That’s why thousands of CEOs and CFOs outsource accounting processes with Consero to set up a system of internal accounting controls and avoid common accounting mistakes.
Our proven Finance as a Service (FaaS) model provides the systems, processes, and people to quickly operationalize your finance function to produce reliable, board-level reporting powered by our AI-enhanced platform.
If you already have existing technology, we have the expertise to work within your existing system and general ledger. Through Consero’s FlexFinance service, we can manage the back-office F&A function from end-to-end process, including closing the books. When you need skilled talent, we can supplement your F&A team via our FlexResources.
No matter your need or stage of growth, Consero offers flexible, tailored solutions to meet your needs.