I hope by now you’ve realized that accounts receivable fraud is a rather complex subject. We’ve covered quite a bit so far, but more study is needed. This column discusses learning objectives from another type of on-book accounts receivable fraud scheme I’ve commonly seen in the government workplace.
Other Accounting Manipulations
In the primary scheme involved in this area, a perpetrator manipulates accounting records by recording a smaller amount of cash receipts in the control account (which agrees with the daily bank deposit total) than is recorded on the subsidiary ledger cards for all customer payments in the accounts receivable system for the applicable revenue stream (such as property taxes, utilities, etc.). This causes an imbalanced condition between the control account balance and the total of the balances on all subsidiary ledger cards.
I receive frequent inquiries from financial managers who want to know how an employee could possibly record different amounts in these records. This is a one-sided transaction, that’s for sure. Once detected, managers or auditors simply write-down the control account balance to make it agree with the total of the subsidiary ledger card account balances because they just can’t seem to find a reasonable explanation for this unusual condition. Everyone trusts the subsidiary ledger card balance for all accounts because, absent customer complaints about erroneous account balances, it just has to be correct. And it’s always the control account that is written-down because the imbalance must simply be an administrative error. Of course, this action is only taken when nobody has been able to detect a fraud that’s in progress. If someone detects a fraud, the managers or auditors obviously would take different actions.
The critical fact to remember is that these unsupported adjustments eliminate accountability for missing funds and often help to mask or conceal fraud schemes for long periods of time. Some managers believe they’ll never have this problem because their organization’s computers help them detect this type of fraud. We must always remember that everything is possible, whether the organization uses manual accounting records, a hybrid of stand-alone computers and manual accounting records, or computer accounting records. It’s just a matter of time before wayward employees compromise the internal controls. In this case, fraud occurs anytime managers are so trusting that they fail to monitor the critical accounting reports comparing total customer collections to total bank deposits.
Fraud Case Study No. 1