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QuickBooks Helps Shut Down Fraud
With a few clicks and only minor adjustments to your accounting software, you can add another layer of fraud protection.

Software isn't a solo solution to stopping fraud, but it can be an important frontline soldier. For Steve McFarland, a private detective in San Jose, QuickBooks acts as his principal aide in tracking down fraudulent activity within some small businesses.

QuickBooks helped McFarland crack one of his largest fraud cases involving a Gilroy, CA, general contractor. By reviewing the contractor's bookkeeping paper trail, McFarland uncovered $1.2 million worth of check fraud and embezzlement activity.

Here's the scam pulled by the contractor's employees. The two employees responsible for bookkeeping began writing checks to bogus vendors. Then, they cashed these checks through a third-party cash checking company where a cashier earned 10 to 15 percent of the check for keeping quiet.

The two employees had a second racket going, too. The fraudsters were cashing checks from vendors and depositing them into their personal accounts. In QuickBooks, the employees never marked the vendors' checks as received.

To add further insult, the employees were also increasing their paychecks by adding net addition in the form of expense reimbursements. "These folks were brazen, and they got progressively more brazen, which is often the case," said McFarland.

The PI tracked the fraud by cross-referencing invoice files with cash receipts files to see which checks were missing. And, he used QuickBooks' audit trail to find the voided transactions and track the fraudulent activity back to the guilty employees.

"Using the audit trail creates more data and larger files, but it is a great help in checking out who did what and when," says McFarland.

QuickBooks users can turn on the audit trail by going to the Edit menu and choosing Preferences. In the Preferences window check Account in the left-hand scroll box. On the Company Preferences tab, select the "Use audit trail checkbox." Click OK.

The audit trail feature will keep a record of all transactions entered, every change made to the transaction and who entered and modified the entries.

Seven Warning Signs of Potential Fraud

From Steve McFarland, founder and CEO
of Accountants & Fraud Examiners (www.fraudpro.com)


Stale Items in Reconciliations. In bank reconciliations, deposits or checks not included in the reconciliation could be signs of theft. Missing deposits could mean the perpetrator absconded with the funds; a missing check may connote a check made out to a bogus payee.


Increasing Reconciling Items. Stolen deposits or bogus checks are frequently not removed, or covered, from the reconciliation. Hence, over a period of time, the reconciling items tend to increase.


General Ledger Out-of-Balance. When funds, merchandise, or assets are stolen and not covered by a fictitious entry, the general ledger will be out of balance. The owner must take an inventory of the merchandise or cash to confirm the missing assets existence.


Adjustments to Receivables or Payables. In cases where customer payments are misappropriated, fraudsters make adjustments to receivables to cover the shortage. In accounts payable, the perpetrator can use a phony billing scheme to convert cash to his or her own use.


Large Payments to Individuals. Excessively large payments to individuals may indicate fraudulent disbursements.


Write-off of Accounts Receivable. Comparing the write-off of receivables by customers may lead to information indicating that an employee has absconded with customer payments.


Excess Purchases. Excess purchases can be used to cover fraud in two ways: Fictitious payees are used to convert funds, and excessive purchases may indicate a possible payoff to a purchasing agent.

Proactive Fraud Prevention

While McFarland often gets calls to chase down fraud after the fact, many small business owners are looking for more preventative fraud management strategies. QuickBooks Product Manager Jacint Tumacder advocates prudent allocation of passwords and permissions as important safeguards against fraud.

During the initial set-up of QuickBooks, Tumacder recommends that owners take the time to thoughtfully consider which users should have the rights to access key accounting reports. Too often, Tumacder says, small business owners rush through the set-up leaving the default as admin and giving full access permissions to all employees.

"Each user should have an individual password. They shouldn't be sharing user names and passwords," adds Tumacder. "Owners should be selective about permissions and make them granular depending on the employees' responsibilities."

Owners may limit a user's rights to accounts payable records or give them permission to create transactions only — not complete transactions. "You may want to allow a user to enter checks but not print checks," Tumacder continues. "These decisions can take away a fraudster's opportunity."

If you haven't assigned passwords and permissions in QuickBooks, you can easily add these protections now. Under the Company menu, choose the option setup users. Click on user list. Here you can add users and give usernames and passwords. QuickBooks will lead you through a series of questions, and in less than a dozen clicks and within a few minutes, you can update your user list and their passwords.

Only the QuickBooks' administrator can set, or change, user permissions. To add permissions, click on the Company menu and choose Set Up Users. Select the user whose permissions you want to change. Click Edit User. Enter your changes in the screens that appear. Click Next to go to the next screen. When the last screen appears, check the table that summarizes the user's new access rights. If you need to make a change, click Prev to return to the appropriate screen. Click Finish to complete the setup process.

These straightforward safety measures could prove to be invaluable to a small business. According to the Association of Certified Fraud Examiners, the average fraud in companies with fewer than 100 employees causes $127,500 in losses. In comparison, the average losses for large businesses are significantly less, totaling $97,000.

The ACFE claims that small businesses are at a greater risk because they often are lax about introducing basic accounting controls.

FraudPro's McFarland is quick to point out that accounting software alone won't shut down fraud completely. "Software like QuickBooks gives owners more knowledge about their business, but they still need the old gray matter to supervise tools and employees."

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