This past week a friend of mine that is a business owner asked me what responsibility the outside accountant had in relation to a bookkeeper’s theft.
What is the accountant’s responsibility? Depending on what level of accounting is being prepared by the accountant; be it a tax return, a compilation, a review or an audited set of financial statements, determines how an accountant’s responsibility is determined.
An audit is the highest level of responsibility the accountant has regarding a set of financial statements. Based on the AICPA requirements auditor is required to brainstorm prior to the audit, to determine where in the books and records of the client is there potential risk of fraud. After the brainstorming the auditors must test any area that is a potential fraud risk. To see more click here: AntiFraud and Corporate Responsibility Center.
Just because the accountant tests for fraud doesn’t mean that he or she will find it. In testing, the auditor is reviewing random transactions. The chances of testing and finding fraud is very difficult, there can be collusion or the test data did not happen to be the ones where fraud occurred.
An auditor’s report does not say that the financial statements are correct or perfect and has no errors. The auditor’s report states the financial statements “are presented fairly”. The CPA can not say every transaction has been handled correctly. To do that would mean that the auditors would have to review every transaction that the company had. The cost would be unbearable for a business.
As to the other type of financial statements there is even less responsibility to find fraud as the accountant is not testing transactions. However, if the accountant is suspicious that there is a problem, he or she must follow up and may not ignore the possibility just because it is not an audit engagement.
When looking at financial statements, comparing activity on a year to year and/or a year to budget based on dollars and percentages is important. Any large variances should be reviewed and discussed with management and the owners.
If one person controls all aspects of cash or any other valuable assets, procedures should be in place that requires other levels of management to review the work under the control of one person. Management must monitor the employee’s work, follow the procedures.
If there are internal controls with a separation of duties the only way fraud can occur is through collusion. When there is only one person in the bookkeeping department it is alot easier to commit fraud.
Therefore it is the resposibility of management or the owners to review the work of the bookkeepers and make certain to set up procedures to minimize the possibility of theft. This is especially true when there is a large amount of purchasing of material for cash.
Here is my friend’s case:
A part-time intrern was trying to reconcile the petty cash slips. When he found a variance, he went to the owner and not the bookkeeper. After speaking to his accountant and making copies of all the paperwork for this petty cash reconciliation the owner had the intern show the bookkeeper the discrepency the bookkeeper said she would take care of it. She changed a number to make the totals work; however, there was no backup to the change.
After seeing how the adjustment was made, the accountant reviewed the books and it was determined that she had embezzeled over $50,000 during the past few years.
Where does the responsibility lie?