Risk

Error-prone accounting systems

Manual or inadequate electronic accounting systems make it easy to avoid procedures.

Risk type: Cause

Risk driver: Internal

DESCRIPTION

Using manual or inadequate electronic systems for billing and accounting creates an environment conducive to the manipulation of data and embezzlement of funds. This makes it easier to circumvent procedures and delegated authority, as well as to cover up irregularities, which in turn increases the risk of theft and misappropriation of funds.1

This risk is increased if documentation, accounting, and reporting are not controlled and audited properly. Bad accounting practices also make it difficult to detect and prevent other detrimental business flaws.2

The following illicit practices may be the result of error-prone accounting systems – and are not limited to the financial department of an organization: 3

  • An employee failing to record purchases properly in order to misappropriate cash
  • An employee misappropriating cash during withdrawal or transit
  • An employee accepting or soliciting money or a benefit to provide cash to a third party
  • An employee accepting or soliciting money or a benefit to provide a good or service to a third party without taking a cash payment from that party
  • An employee being bullied or threatened to misappropriate cash or avoid proper payment for a good or service by a third party
  • An employee artificially inflating the value of a good or service to misappropriate cash

RED FLAGS

  • Manual accounting or old electronic accounting system2
  • Inadequate documentation of payments2
  • Non-existent or badly managed archives
  • No or inadequate quarterly revenue and expenditure statements and comparisons with original budget figures4
  • No indicative balance sheet, with detailed information about current and long-term assets in addition to short- and long-term liabilities4
  • Lots of payments of figures just under the amount that requires additional signatures
  • Questionable invoices
  • Inadequate payment documentation, e.g. missing supporting documents for payments
  • Lots of corrections in manual cash books or pristine records – i.e. a manual cashbook that looks as if all entries were written on the same day

KEY GUIDING DOCUMENTS

Wu, X., 2005, Firm Accounting Practices, Accounting Reforms and Corruption in Asia. Policy Soc. 24, 53–78

ICAC, no year, Cash Handling, Independent Commission Against Corruption New South Wales (ICAC), http://www.icac.nsw.gov.au/preventing-corruption/knowing-your-risks/cash-handling/4909, accessed 15.10.2015

Asís, M. G. de, Leary, D. O., Ljung, P., and Butterworth, J., 2009, Improving Transparency, Integrity, and Accountability in Water Supply and Sanitation, World Bank Institute and Transparency International

TARGETED EXAMPLES

Weak financial controls at Sydney Water5

Target group: Utilities

Location: Sydney, Australia

An inquiry revealed that Sydney Water’s financial controls had a number of weaknesses that allowed [a contractor] to obtain money from Sydney Water. The controls did not reveal Mr Harvey’s misuse of his financial delegations, order splitting to hide large transactions within his delegation, or his submission of questionable invoices for payment. […] Sydney Water’s systems allowed Mr Harvey to request, approve and certify delivery of services purportedly provided by [the contractor]. Mr Harvey was not required to involve any other Sydney Water person, including his supervisor, in these transactions. […] Mr Harvey was able to circumvent the safeguard of delegation limits by splitting a large order into smaller components that fell within his largely unmonitored delegations. Order splitting effectively removes the cap on potential losses inherent in the delegation limit. With a heavy reliance on manual checks, rather than a more sophisticated automatic analysis of payment patterns, Sydney Water was not able to detect this behaviour.

FULL REFERENCES

  1. Greene, C. L., 2013. Focus on Employee Fraud — Purchasing Frauds, http://www.mcgoverngreene.com/archives/archive_articles/Craig_Greene_Archives/Focus-Employee_Frauds-Purch.html, accessed 10.11.2015
  2. Wu, X., 2005, Firm Accounting Practices, Accounting Reforms and Corruption in Asia. Policy Soc. 24, 53–78
  3. ICAC, no year, Cash Handling, Independent Commission Against Corruption New South Wales (ICAC), http://www.icac.nsw.gov.au/preventing-corruption/knowing-your-risks/cash-handling/4909, accessed 15.10.2015
  4. Asís, M. G. de, Leary, D. O., Ljung, P., and Butterworth, J., 2009, Improving Transparency, Integrity, and Accountability in Water Supply and Sanitation, World Bank Institute and Transparency International
  5. ICAC, 2011, Investigation into corrupt conduct of Sydney Water employees and others, ICAC Report March 2011, Independent Commission Against Corruption (ICAC)
Last updated 19 February 2019

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