Don’t let financial fraud happen to you: how to manage journal entry processes for compliance and control in your organisation

By Tim Woodhouse on May 20, 2020

If you look at the financial scandals in the last two decades, no matter what the fraud method or practice, somewhere along the line someone made an ‘adjustment’ or in accounting lingo a “Journal Entry.”

Huge amounts of time and money are invested by companies into SAP, but manual processes like journal entry continue to leave businesses exposed to significant human error or fraudulent activities. This ultimately creates the opportunity for the potential fraudulent statement of financial results and all the implications that brings.

HealthSouth Corporation inflated its earnings by $2.8 billion over six years. This is a comment from the case: “By 2002, the gap between what HealthSouth was reporting and its actual numbers was hundreds of millions of dollars every year. There were as many as 126,000 fraudulent journal entries in a single quarter.”

In the Xerox scandal, revenues were overstated over five years by more than $3 billion by booking long term service revenue as one time ‘Box’ revenue, only a manual adjustment could make this happen. These manual adjustments were made at the group corporate level when finalising the consolidated accounts.

Areas where manual journal entries can lead to fraud include:

  • Setup of G/L accounts:G/L accounts make it easier to manipulate financial statements and to hide fraud. If you have little control around this process, then you are opening yourself up to fraud by those who are setting up new account codes.
  • Compliance & Control:There are several areas that must be governed to prevent illicit or fraudulent activities including who can request a journal, value limits approvers, accounts and cost centres an individual can post to, to name a few. Then there’s the much needed transparency around who can review them and who can approve them to ensure proper checks and balances are in place.
  • G/L accounts with little usage: These little used accounts have infrequent transactions which the fraudster uses to hide their tracks. Often these low volume transaction accounts are omitted from balance sheet reconciliation and these postings will go undetected.
  • The fraud cabal: the fraudsters are usually a small group so rotating people’s roles, approval involvement, and authority levels will lessen the chance that a crime is committed.

Now you can see how easy it is for all of those situations to line up in perfect harmony to facilitate fraud. Controls are often in place around day-to-day accounting like invoice approvals, and so surely the same controls should be in place at a consolidated level too. The cases mentioned in this post saw the unilateral creation of multi-million dollar journals without any checks or balances.

ERP and finance systems have very little control over the manual journal process and setup of new account codes. So what is the answer?

Digital Transformation and automation needs to be added into processes to deliver control, compliance, auditability and all-around good scrutiny over manual journal creation. It can also introduce ‘smart detectors’ to flag up postings to rarely used accounts and deliver granular data for reporting purposes to spot high journal volumes or repeating journals for strange looking amounts.

Winshuttle’s new automation platform Evolve automates strategic data processes where data and process are interdependent. What does this look like at the ground level? Let’s start by stating that there will be no more emails instructing journals to be created or journal content secretly emailed on Excel spreadsheets. No journal will need to be created directly in an SAP screen.

Winshuttle Evolve delivers a modern user interface fit for 2020 where each contributor in a process is presented with just what they need to see that’s appropriate to their skill set and role. Additionally, there’s a Workflow/BPM type of environment for sharing work, monitoring status and tracking, enabling you to eliminate all of the potential areas for fraud mentioned in your financial accounting function.

For more information on how Winshuttle can help you to eliminate fraud in manual journals, visit our Winshuttle Evolve page.

About the author

Tim Woodhouse

Tim is in Strategic Sales for Shared Services and GBS’ at Winshuttle, with 11 years experience in ERP based solutions that include Digital Transformation, RPA, Purchase To Pay, Order To Cash and Content Management. Tim is based in the UK but predominantly works in Eastern Europe, the epicentre of the European Shared Services industry.

Questions or comments about this article?

Tweet @Winshuttle to continue the conversation!