January 2014
General Journal Entries:
A Common Vehicle for Employee Theft
By Edmund J. Reinhard, CPA, and Joseph K. Ro, CPA
The Association of Certified Fraud Examiners estimates1
that the typical organization loses 5 percent of its
annual revenues to occupational fraud. Dealerships
long have been vulnerable to such employee theft due
to their high volume of transactions, the high value
of transactions, and the presence of large amounts
of cash. It also doesn’t help that most dealerships
do not undergo regular assessments of their internal
controls, regular testing of their internal controls,
or financial statement audits. Many thefts often are
hidden through entries in a dealership’s general
journal. The good news is that tightening the controls
around general journal entries can help reduce the
risk and increase detection of employee theft.
The Risky Current Environment
The auto industry was one of those hardest hit by the recession. As sales
plummeted, many dealers were forced to slash their staffs, including in
the accounting department where fewer employees had to assume greater
responsibilities. As dealers scrambled to remain in business, internal controls
frequently were overlooked. Even as the economy and the auto industry have
emerged from the recession, the lack of focus on internal controls has lingered.
Unlike with other entities of their size, the financing structures in dealerships
generally allow them to escape financial statement audits that would include
regular assessment and testing of internal controls. As a result, limited internal
controls are common in dealerships. In particular, general journal entries often
receive little, if any, scrutiny, making them a convenient tool for hiding fraud.
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Understanding the Role of the General Journal
The general journal is perhaps best understood as an accounting catchall for
transactions that aren’t recorded in a specific journal (for example, a payroll
or cash disbursements journal) before those transactions are recorded in the
general ledger. It’s intended to be used for one-off transactions that can’t
be processed through normal accounting journals or to correct errors.
Dealers, however, tend to record in the general journal every transaction that doesn’t
obviously fit into another category. For example, if a dealer receives an electronic
funds deposit, the dealer likely will
record that deposit through the general
journal and not the cash receipts
journal. Including items that shouldn’t be
processed through the general journal
makes it more difficult to review and
manage the entries. If a dealership has
weak internal controls over the normal
accounting systems, a would-be thief
might find it easy to hide fraud in the
general journal because it typically has
looser or even nonexistent controls.
An example would be the employee who
receives a cash payment for a receivable
that is on the dealership’s books. The
employee could pocket the cash and
simply make a general journal entry to
either write off the receivable or move it to
another balance sheet account that isn’t monitored as closely as the receivables
account. Similarly, an employee could draft a check to him- or herself from a
dealership account and use the general journal to record it to an account that
isn’t regularly reviewed.
Dealers can reduce the risk of such theft by implementing strong
controls over the general journal. By doing so, dealers will:
■■ Increase control over their accounting and financial reporting
■■ Have support on hand for each journal entry in case of internal or external audit
or inquiry
■■ Increase their overall control environment
■■ Reduce the likelihood of fraud
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Weak internal controls over
the normal accounting
systems make it easy for a
would-be thief to hide fraud in
the general journal because
it typically has looser or
even nonexistent controls.
General Journal Entries: A Common
Vehicle for Employee Theft
Recommended Controls for the General Journal
To regain control over their general journal, dealerships need to establish a formal
general journal entry policy. The policy should incorporate the following considerations:
■■ Limit general journal entries to corrections, write-offs, and unusual items.
All other transactions should be entered in the appropriate journals. The general
journal should not be used as a catchall.
■■ Properly document general journal entries on a journal voucher. The voucher
should include the following:
Description of the journal entry
Support for the journal entry
The signature or initials of the preparer of the journal entry
The signature or initials of the reviewer of the journal entry
The dates of preparation, review, and recording
■■ Number general journal entries using a journal entry log sheet or some
similar control process. Many general journals are blank sheets with no numbers
or sequencing. Numbering facilitates review. After all, without numbering, how can a
reviewer know that he or she is examining the entire population of entries?
■■ Segregate to different employees the preparation, review, and recording of
general journal entries. One of the most effective weapons in fighting fraud is
segregating duties. For the general journal, this means different individuals should
prepare, review, and record entries. The number of employees who need access
to record to the general journal should be limited. The recorder, who can be any
employee who doesn’t have conflicting duties, should record only with a journal
voucher described earlier, and the reviewer should be at least one level up in the
organizational hierarchy from the preparer (for example the warranty clerk could
prepare the entry, while the office manager, controller, or CFO reviews it).
■■ Review the general journal monthly to confirm that each entry is supported
by a journal voucher and each journal voucher is accounted for in the
general journal. Any differences between the general journal and the journal
vouchers should be investigated, and resolution should be documented.
■■ Limit access to the general journal to only those individuals approved to record
general journal entries. For example, access should not be given to anyone who:
Handles cash
Prepares the bank reconciliation
Prepares checks
Signs checks
Receives payments, cash, or checks
Receives accounts receivable
Processes payable invoices
Processes payroll
Processes electronic fund transfers
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Contact Information
Ed Reinhard is a partner with
Crowe Horwath LLP in the
Columbus, Ohio, office. He can
be reached at 614.365.2202 or
[email protected].
Joe Ro is with Crowe in the
Livingston, N.J., office. He can be
reached at 973.422.4542 or joe.ro@
crowehorwath.com.
ACFE, “2012 Report to the Nations,”
http://www.acfe.com/rttn-highlights.aspx
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■■ Do not record corrections and write-offs through nonadjusting journal
entry sources such as cash disbursements, cash receipts, or vehicle sales.
For example, if a dealer has collected $400 on a $500 receivable and is writing
off $100, it might debit cash for $400, credit receivables for $500, and write off
$100 using a cash receipt entry. But the cash receipt should reflect only cash
actually received – the write-off should instead be captured in the general journal,
separate from the receipt. If write-offs and corrections are recorded through
nonadjusting journal entry sources, the dealer will need additional internal
controls to prepare, approve, and monitor these entries.
■■ Review and adjust regularly the list of users with access to the general
journal. As already explained, the list of employees with access to the general
journal should be limited to a few people. Which employees can grant and remove
access also should be limited to a few people.
■■ Generate reports to facilitate review of the general journal. For example, a
dealer might generate a report that shows all general journal entries recorded
between 11 p.m. and 6 a.m. or recorded on holidays.
Your Next Move
General journal entries are the most overlooked area when it comes to internal
controls and therefore one of the highest exposure areas for employee theft.
Dealerships would be well-advised to review their controls over general journal
entries and update the controls to make them stronger where necessary. It would
also be wise to review previous general journal entries for appropriateness.
Crowe Horwath LLP is an independent member of Crowe Horwath International, a Swiss verein. Each member firm of Crowe Horwath International is a separate and independent legal entity.
Crowe Horwath LLP and its affiliates are not responsible or liable for any acts or omissions of Crowe Horwath International or any other member of Crowe Horwath International and specifically
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Carolina are rendered by Crowe Chizek LLP, which is not a member of Crowe Horwath International. This material is for informational purposes only and should not be construed as financial or
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legal advice. Please seek guidance specific to your organization from qualified advisers in your jurisdiction. © 2014 Crowe Horwath LLP
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