Of all the insidious scams that plague the staffing industry, writeoff fraud stands out as one of the easiest to commit.
It’s always been that way, even before computers. My Dad, who travelled the country in the 1960s opening up staffing branches, often came home with such stories.
In reference to a St. Louis branch of a scam-plagued agency his firm bought out: “She’d just tear up those invoices – one here, one there - and no one else was allowed to touch A/R”.
The owner didn’t reconcile AR and blew off the GL accounting work when the numbers didn’t foot.
It was so easy back then. Account receivable (AR) invoices were kept in a manila folder. As long as the invoice was in that folder, it was considered unpaid.
Writing off an invoice was as easy as crumpling it up and throwing it away. Usually the fraudster had a partner – a relative who got paid as a temp on the destroyed invoice. The variations are countless.
Over the decades, software purported to mitigate AR fraud, but the reality has been different. With many staffing software systems, writing off an invoice was as easy as clicking a button.
No messy paper to destroy. No trail back to revenue that would impact those carefully monitored sales commissions. Only the most diligent of staffing company owners would carefully review their credit memo history.
More mature accounting systems make writeoff fraud much more difficult. For one, they assign a role for handling cash distinct from that of AR adjustments.
At TempWorks, we also make it impossible to post non-zeroizing adjustments. For every writeoff, you need a balancing negative writeoff with the obvious effect that the hit gets reflected in those carefully scrutinized revenue numbers.
Oddly, this gets us the occasional complaint from a new customer: “TempWorks won’t let me close out this batch!”.
After a polite explanation, the client will sometimes persist “Just let us do it. That’s how we did it with our old system.”
Although innocent in the vast majority of the cases, we’ve had several instances of internal fraud discovered as a result of this important system safeguard.
Here are just a few of the common ways to avoid AR fraud:
- Do not allow non-zeroizing adjustment batches.
- Carefully review all writeoffs.
- Maintain separate roles for cash and adjustment posting.
- Rotate personnel.
- Pay great attention to anyone refusing vacations or refusing to give up control over accounting.
- Outsource your invoicing and collections with a full service payroll funding company (had to fit this in somewhere)
In cash-oriented businesses like staffing, scams abound and many involve manipulations of accounts receivable, especially the bogus creation of credit memos.
These writeoffs can go undetected in any size company but young staffing companies that focus disproportionately on revenue growth over internal accounting processes are especially susceptible.
Why does accounting fraud occur?
(a pictorial courtesy of acc418)