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Counteract Fraud: Transactional Rigour and Financial Information Rectitude

August 26th 2021

Financial Information Rectitude

Who hasn't heard of fraud in recent years? The regulatory weaknesses of the stock exchange system combined with the creativity of the financiers of large listed companies have given rise to sad awakenings for small investors.

Like any organization that processes a large flow of information and money every day, unfortunately, not every business is immune to fraud.

How to better protect ourselves against this crime? In this article, I will limit myself to the protection that well-designed management software can give you against internal fraud. Indeed, your management software can play a strategic role against fraud in two ways:

  • By its transactional rigour, it ensures the correctness of your financial information through appropriate validations at the source of information, therefore, upstream of its creation.
  • By its control functions, it can establish periodic management validation points. In other words, downstream of the financial information created.

Indeed, there is a direct link between the degree of the rectitude of your financial information and the degree of exposure to fraud. So your software's ability to prove that your financial information is correct and that it truly matches your business depends entirely on its thoroughness in creating and manipulating financial data.

Management software that is said to be robust in terms of financial reporting should respect, for example, the basic concepts of GAAP (generally accepted accounting principles) defined by the CICA (Canadian Institute of Chartered Accountants). I leave it to the accountants to explain to you how these principles work to increase the rigour of your financial operations. But, to put you here, here's a typical situation that is not allowed under GAAP:

It is not allowed to destroy or modify an accounting entry (e.g., an invoice) without leaving a trace. Thus, any change entry must first be reversed (that is, reversed by posting a reverse entry) and then posted again.

I chose this example because it is a principle frequently bypassed by software on the pretext that we must simplify the user's task.

Indeed, destroying an entry directly instead of reversing it and then recording a new one is much simpler. It is also true that directly modifying a client's receivable balance on their record without adjusting the journal entry is also much easier.

However, doing this significantly reduces the degree of correctness of financial reporting that you are entitled to demand from a management software. In fact, it is the door open to fraud; If an entry is not traceable (Who? What? When?), it becomes challenging, if not impossible, to trace the source of inconsistency, which most of the time appears a few months later in your financial statements or at the end of your fiscal year.

Consequently, the transactional rigour of your management software should not be seen as an irritant but rather as a protection against the degradation of the quality of your financial information and the risks of fraud.

Regarding the control functions of your management software, it is strongly recommended, as a manager, to maintain some degree of control over the financial information that circulates there. And this is done through periodic validations. Obviously, what each manager can invest in time and effort depends on the size of their company, the time they have available and their interest in financial matters. If you cannot do periodic validations yourself, at least monthly, I suggest that you delegate this task to an accounting specialist, for example.

In concrete terms, does your computerized management solution allow you to perform simple and rapid checks periodically? Here are some examples of features to look for:

  • A function that allows you to check whether there is a perfect match between the content of your schedule and your billing for a given day or period. This task can be completed quickly, and any anomalies found should allow you to spot a questionable case immediately.
  • An integrated accounting module. The simple function of "bank reconciliation" becomes a very effective weapon to detect any inconsistency between billing and accounting (payment) receipts. The "full integration" aspect between the invoicing and accounting sides of your solution is a crucial element. Because there is an automatic accounting entry and not a manual entry (two different software), bank reconciliation acts effectively as a means of control.

Of course, the subject could be explored further. However, in conclusion, I remind you of two fundamental principles:

  • With your current software, can your staff destroy or modify an accounting transaction without leaving a trace? Yes. The risk of you being the victim of fraud is higher.
  • Do you personally validate specific key management indicators on a monthly basis? No. You are more exposed to unpleasant surprises in the medium term.

We can undoubtedly say that CTRL management solutions are among the most rigorous and efficient information management regarding the legal criteria of confidentiality, authenticity, inalterability, and traceability. To learn more on the subject or discover the protection our CTRL management solution offers you, do not hesitate to contact a CTRL advisor.

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