What's Hiding in Your Miscellaneous Expense Account?

Business owners often spend their time reviewing revenue, payroll, and cash balances. Those are important. But there are other areas that deserve attention as well.

One of them is the collection of broad accounting categories that tend to accumulate transactions over time... accounts with names like Miscellaneous Expense, Sundry Expense, Other Expense, or Personal Expense.

These accounts are perfectly legitimate when used appropriately. However, because they are broad by nature, they can also become convenient places to hide transactions that receive little scrutiny.

A California criminal case illustrates this point. According to federal prosecutors, a business manager concealed unauthorized withdrawals from client accounts by coding them to vague expense categories and providing misleading explanations when questioned. The alleged losses exceeded $7 million.

The lesson isn't that every miscellaneous account is suspicious.

The lesson is that vague accounting categories deserve periodic review.

Large balances, unusual descriptions, repeated adjustments, or transactions lacking supporting documentation all warrant a second look.

Good fraud prevention doesn't mean assuming the worst about your employees or business partners. It means asking reasonable questions and verifying that transactions are supported by appropriate documentation.

And remember... Trust is not an internal control.

This article was inspired by the federal prosecution of California business manager and CPA Jonathan Todd Schwartz. According to the U.S. Department of Justice, Schwartz concealed unauthorized withdrawals by recording them as "sundry/personal expenses" in client accounting records.

Source:

U.S. Department of Justice – CPA Sentenced to 6 Years in Federal Prison for Embezzling $7.2 Million from Alanis Morissette and Other Celebrities