Writer Alfred Erdmann is a partner with Eisner & Lubin LLP in New York. His practice includes a focus on accounting and auditing services for real estate owners and operators. He can be reached at 212/829-3215.
Frustrate Fraudsters Fast
Here are four tips to protect your company from financial chicanery.
July 1, 2008
If yours is a small real estate brokerage, you likely have limited resources in your accounting and finance departments. It’s not uncommon for a small brokerage to have just one or two employees handling all aspects of accounting.
This lack of segregation can be a recipe for disaster if left unmonitored, no matter how professional and trustworthy your accounting staff.
Just as a matter of standard prudence, it’s in the interest of your brokerage — and of your accounting staff, too, if only to protect against misunderstandings — that you implement a system of checks and balances. Publicly traded companies have no choice but to do so, and ever since the days of the Enron and Worldcom scandals, they have to do it following standards of ever-increasing rigidity.
As a small, independent brokerage, you won’t have that regulatory threat hanging over your head. But you can easily adopt the most basic accounting fraud protections to your operations. Some ideas:
If you work with another company to manage your rentals, for example, be clear that it has protections in place to ensure expenses are paid to the correct entity with the correct funds. Also make sure close review is given to the financial reports received.
Be sure the company has in place a written policy for approving invoices; follows a single list of approved vendors; and makes clear who is authorized to write off delinquent accounts.
- Divide the preparing, signing, and mailing of manual checks among three staff persons. Allowing the person who prepares the checks and records them in the books to also send them out after they’ve been signed by a top executive allows that person to alter them after signature and send them to an unapproved entity. Separating the preparation and mailing functions reduces that opportunity.
- Separate the processing of incoming checks. To limit accounting personnel’s opportunity to skim from incoming revenue, have the receptionist or someone else outside of accounting open and account for checks before they’re routed to your finance staff.
- Separate processing and reconciliation. Don’t let the same person enter transactions into the general ledger and prepare bank reconciliation statements; otherwise entries can be altered to hide skimming.
- Monitor managing agents and other partners. Make sure any affiliates or other companies with which you work maintain precautions similar to your own.
By taking the small step of separating certain functions, you can greatly reduce the opportunity for — and thus the incidence of — financial fraud in your brokerage.