Bates Research - 01-24-14

Accounting Fraud

The SEC recently announced that it has reached a $5 million settlement related to earnings manipulation by Diamond Foods, Inc.  The investigation turned up evidence that walnut costs were smoothed over multiple periods in order to manage earnings and analysts' expectations.  While this investigation predates Mary Jo White's tenure at the SEC, it fits within her overall pledge to put more of the agency's resources into investigating accounting fraud.  For some insight on how businesses of all sizes can protect themselves from fraud, we turned to David Zweighaft of DSZ in alliance with Bates Group. 

David Zweighaft David Zweighaft, CPA/CFF, CFE, has been featured on MSNBC’s Your Business giving accounting advice to business owners.  Zweighaft, the managing partner of DSZ Forensic Accounting and Consulting Services (in alliance with Bates Group) and adjunct professor of forensic accounting at New York University, is a CPA and certified fraud examiner. [This Q&A has previously appeared in the AICPA's "Ask the Expert" section of the Forensic and Valuation Services (FVS) webpage]

Protecting a Business from Accounting Fraud

Q. How can CPAs add value when it comes to accounting fraud?

A. Here are 10 important accounting tips for businesses of all sizes.  CPAs can share them with clients and discuss ways to follow them.

  1. Ensure there is sufficient segregation of duties so that no one individual has more than one of the following: access to assets, the ability to record transactions, and record keeping responsibilities.  An example would be a bookkeeper who has control of the checkbook, maintains the cash receipts and disbursements journal and receives and reconciles the bank statements.   
  2. For all disbursements above a specified amount, require two signatures for approval of checks.
  3. Require multiple bids on all purchases above a specified amount.
  4. Conduct surprise cash counts or inventory counts at least twice a year.
  5. All employees should take their full vacation allotment, with at least one full week taken consecutively.
  6. Incorporate a vendor audit clause into all purchase agreements that allows the customer to review or audit the vendor's records for that customer.
  7. Develop a code of conduct that defines and expands the company's mission statement and explicitly states what behaviors are unacceptable, as well as the consequences of violating the code.  Have all employees, officers and owners sign a document stating that they have read the code, understand it and agree to abide by it. Require that all personnel sign a re-affirmation of the code annually.
  8. Perform thorough background checks of all employees before hiring.
  9. Communicate a zero-tolerance policy for any fraud, dishonesty, conflicts of interest, or other prohibited practices.
  10.  Maintain a hotline or other anonymous reporting mechanism for employees to report unethical behavior without fear of retribution.  Provide a feedback mechanism so that employees reporting suspicious activity can learn the outcome of their calls.
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