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Reducing fraud

Front page of our local paper this morning was the story: Police inquiry into missing students funds

It’s very distressing that organizations that should be doing so much good in the community are put at risk because of the dishonesty of a few.  Unfortunately we see this occur far too frequently.

Desktop accounting software, where just a few people have control of financial records, makes it very easy and tempting for fraud to occur.  It’s relatively easy to cook the books or just not provide them.  It could be months later when fraud is discovered.

Online accounting is the ideal control for reducing the temptation and ability for fraud in community organizations.  Here are some of the ways.

  1. Multiple people can see the books at any time. Xero even has a read only view for trustees to sort through the numbers.
  2. Direct bank feeds allow anyone authorized to see the bank balance, without needing access to online banking.
  3. Expense claims and Accounts Payable have to be approved.  There is workflow and multiple user roles to ensure proper segregation of duties.
  4. Reports are easy to generate and can be done and circulated within days of the end of month

The benefits in terms of cost and continuity (if your treasurer resigns you can simply give the new person access with no downtime) are obvious enough. Simply for good governance reasons, online accounting is compelling.

 

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14 comments

Berend de Boer
14 August 2010 #

I think you jumped the gun a bit Rod. No accounting package, including Xero, helps with president and vice-president are intent on fraud. Yes, against one individual, no if you got two.

Rod Drury
14 August 2010 #

Don’t agree. With online accounting the entire board and even broader stakeholder groups can have direct access to the numbers. Because the treasurer knows that numbers are just a few clicks away from any number of people it’s an excellent control. Even against two that are in cahoots.

It’s common sense that the likelihood of fraud drops away considerably as more people get access.

You raise a good point though. For control, how many people should have access to the books? Should an independent non-executive specifically be granted access?

These are good points to consider for Boards. The technology now allows these controls.

ben
14 August 2010 #

This is a compeling point. The non-profit that I am treasurer for has potential exposure to this issue as I am sure most small organisations do. Can Xero handle multiple profit centres within one org? For clarity we have 4 PnL accounting running off 1 Balance Sheet. Ditto for budgets.

Rod Drury
14 August 2010 #

@ben Tracking
Will be doing Tracking for budgets later in the year, but P&L etc there now.

Vivien
14 August 2010 #

I run a Xero Account for my Niece who needs a Kidney Transplant, it is run by friends and Family and we find Xero is great as Mum/Dad, and anyone involved can access the account as we want to be as transparent as possible. So whenever someone donates and would like to see where there money is going this is a brilliant way – we can give them access or send them reports instantly.

James
14 August 2010 #

I’m afraid that in most non profit organisations (make that, most organisations full stop) giving access to anybody but the treasurer is a nice sounding idea, but ultimately pointless because only the treasurer is going to understand the numbers anyway, even fewer will care about them in any way at all.

I’m the treasurer for a medium sized club of about 150 members, if I gave the committee access to the books, they’d have “spent” all the money and then wonder why I got irate – most have no concept of budgets, planning, reports, tax (!)

Each year when I give my treasurers report to the AGM, I’m fairly certain that the entire audience (save for one or two who are in the financial industries) just glaze over for 1/2 an hour.

No, online accounting has little role to play here, the correct, tried and tested solution to fraud detection and prevention, is regular audits by qualified and independant professionals. Online accounting can certainly help with that, but it’s not a replacement by any means.

Andrew Haynes
15 August 2010 #

It’s not the solution in itself, but it’s certainly a great platform to provide good corporate governance over the accounting system.

James R
15 August 2010 #

I recently detected fraud in my company and Xero certainly helped with the process. Firstly my online banking doesn’t have very good search features and doesn’t provide much transaction history. It was much easier to search through bank transactions in Xero with the added benefit of quickly seeing what they had been reconciled against.
The audit features meant I could quickly identity the culprit. It would be great if they could be expanded to enable searching. eg. Find all A/P invoices created by employee x between a date range.

The only problem now is that despite having all this evidence of her stealing many thousands of dollars, the police are unfortunately too busy to do anything and won’t be taking the matter any further. This isn’t great for the country. She might be working at your company next. It seems having good processes and early detection is the only option for business.

While we probably would have caught her with offline accounting software too I do believe that online accounting has the potential to really help with fraud.
I agree that having more people with access to the data discourages fraud. Having the data hosted externally and having transactions automatically imported also makes it impossible to delete evidence.

A great feature in the future would be having Xero doing some automatic detection of suspicious activity. Just knowing it had this capability would make people think twice.

Rod Drury
15 August 2010 #

@JamesR. Check out the General Ledger Exceptions report. Designed explicitly to look for transactions out of the ordinary. We suggest running this report each month.

http://help.xero.com/#Report_GeneralLedgerExcept

@James I feel your frustration. Hopefully having accounts timely or better formatted will assist with engagement in the numbers. Can’t help but think the 1/2 an hour may be related to to the problem :) Maybe try keeping the financial summary to 5-10 mins and use the other 20 minutes to promote discussion of the numbers so it’s more interactive. After 30 minutes of even trapeze artists juggling swords I’m ready for the next thing.

Rod

Hugh
15 August 2010 #

Nice article – 100% agree. Xero is an ideal solution for a multi city office.

We moved from Excel straight to Xero and can’t speak highly enough of how much its improved our business processes.

David Hillary
17 August 2010 #

With online banking and online accounting, much more extensive segregation of duties is possible even for small organisations. What we need now is a standard electronic invoice format that incorporates:
1. digital signature of the issuing organisation so the authenticity of the invoice can be confirmed
2. bank account that the amount owing can be paid to (and associated payment instructions so that the payee can recognise what the payment is for)
3. the line items including codes, descriptions, quantities and value, so that your accounting system can split the transaction as appropriate, and so that your auditor or directors or IRD can check if it was coded correctly

Obviously the invoice approval process exists already in xero. What’s missing is you can’t see if all invoices have been entered, or access or store the source document.

BTW, any chance you guys are working on an invoice copy upload that you can attach to the invoice in xero? This would allow xero to store all required accounting records and the source documents.

Rod Drury
17 August 2010 #

Hi David,

Yes we’re talking to companies like shoeboxed.com who can do the invoice scanning and even some data entry. We see this area as a natural for online accounting.

So much to do, so much to do.

Rod

David Hillary
17 August 2010 #

Rod,

I’m thinking of offering a registered office and billing address service that would, with xero, provide a (near) complete accounting records compliance solution (records of inventory received and dispatched, and physical counts of inventory excepting). Ideally there would be some link on the xero payable (or paid) invoice that would be able to open up the scanned copy (or electronic original) of the document.

David Hillary
17 August 2010 #

on second thoughts, if a business has inventory to handle, inventory management systems like vendhq and unleashed that work with zero would take care of stock receipt and disbursement record keeping, and physical count record keeping as well.

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