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10 Ways Bookkeepers Can Help Prevent Fraud in Small Businesses

Oct 27th 2017
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How would you feel if $40K in cash went unrecoverable with one of your small business clients?

I met this week with my monthly bookeepers and accountants networking group. One group member reported that she is working with a new client who was a fraud victim, let’s call her Sally.

The prior bookkeeper embezzled $40,000 from Sally’s small business. While the bookkeeper was arrested, that is small consolation for Sally, who is unlikely to receive restitution.

So how did it happen? The usual way: Sally over-expanded the definition of “full charge bookkeeper” and let her bookkeeper basically handle everything, because she was “so good” and “so trustworthy.” A Google search of “full charge bookkeeper” defines the role as someone who “typically must have extensive experience with payroll, financial statements, bank reconciliation, and general bookkeeping.”

Notice how that definition does not include this, “someone to whom the business owner abdicates all financial responsibility and oversight of their own business.” Am I blaming the victim? Yes, in part!

A business owner must be responsible for knowing what is going on in their business, and in their books. Just because you have hired a bookkeeper does not mean you no longer have oversight tasks to add to your already long To Do list, Mr. or Ms. Business Owner!

When it comes to safe books, there must always be a separation of duties. If the bookkeeper enters the bills and the bill payments, AND prints the checks, AND reconciles the bank statements, there is opportunity for fraud.

There are so many articles on the importance of separation of duties, and it feels like we have all read them, but we still keep hearing about cases of fraud. This leads me to believe that as industry professionals, we are aware of the risks, but we are not training our small business owners about the risks and how to protect themselves.

As a Certified Bookkeeper with the American Institute of Professional Bookkeepers (AIPB), I studied an entire module called “Mastering Internal Controls and Fraud Prevention.” Note: The study guide for this module can be ordered here. Most of the info you read on internal fraud says similar things.

A typical fraudster starts small, such as “Oh, Sally won’t miss $20,” which then snowballs into, “Sally won’t miss $100” then keeps escalating. The theft continues with other rationalizations in the mind of the fraudster (“I’ll repay Sally as soon as I’m flush again”), and/or personal circumstances come into play, such as a gambling or drug addiction.

Just last week the FraudInfo e-newsletter published by the ACFE (Association of Certified Fraud Examiners) published a link to an article on the DentistryIQ website by Jean Patterson, CPA, CFE explaining the Fraud Triangle and the fraudster’s rationalization process; this is a great read.

Business Owner’s Responsibilities

Let’s start to better train our clients on what their responsibilities are as business owners. They know how to do whatever it is they opened their business to do (consulting; plumbing; attorney-ing), but they have other responsibilities as a business owner. These include:

  1. Looking at monthly bank statements and cleared checks. Refer to my prior blog post on the importance of having check images on the monthly statement.
  2. Looking at credit card statements and monthly charges; verifying payments are made to the card each month and the balance seems reasonable. At one firm where I performed a fraud audit, the bookkeeper was using the firm’s online banking to pay her own Citicard and Chase card, not the firm’s. So debits from checking looked accurate, as the firm did indeed have a Citicard and Chase card, but since the owner never looked at the credit card statements, he did not know that the balances on those cards were increasing every month, and late payment fees and interest were being assessed.
  3. Looking at online banking history; asking questions about transactions which seem unfamiliar.
  4. Looking at payroll reports and paycheck amounts; making sure everyone is receiving gross wages in the proper amount.
  5. Not giving checking signing authority or access to a signature stamp to the bookkeeper.
  6. Having procedures in place to prevent inventory theft. This is a large topic which I won’t go into here; a Google search can provide key advice.
  7. Having Petty Cash procedures in place to prevent theft of cash from the cash box or cash register.
  8. Being “scam aware” of letters and emails pitching services that may not be needed, or which business owners or their bookkeepers can do for free, such as renewing city or county business licenses.
  9. Looking at your P&L and Balance Sheet on a regular basis. Does it seem like your business never has any cash, even though you seem to be billing a lot? Fraud could be the reason.
  10. Requiring timely reports, and looking at them. One firm I know never received their quarterly payroll reports in a timely manner from their small, local payroll firm. It turned out the firm wasn’t preparing them, unless asked, and wasn’t remitting payroll taxes collected to the IRS. No quarterly report in a timely manner was a major red flag which was unfortunately ignored.

Other Fun and Useful Resources

  • Check out the website of Frank Abagnale, from “Catch Me If You Can” fame. He has several free .pdfs for download.
  • Google “separation of duties” and read up on internal controls.
  • Check out the Fraud Resources link on the ACFE website.

Jody Linick, an AIPB Certified Bookkeeper and a QuickBooks Certified Pro Advisor, heads up FitBooksPro (formerly Linick Consulting), which specializes in remote bookkeeping services using hosted QuickBooks and QuickBooks Online.You can find her series of Blog posts here. ​

Replies (2)

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ingrid edstrom
By Ingrid Edstrom
Oct 31st 2017 12:40 EDT

Great article, Jody! Readers may also enjoy this article on prevention of internal fraud in small businesses:
The Southern Oregon Woodard Group has been doing an annual Fraud Prevention Fair educational event for several years for international fraud prevention month in March. This year we are looking to possibly take the Fair online, opening up this free education to a wider audience and getting great apps involved that help support better internal controls, such as TSheets & Together we can stop internal fraud in our small businesses! Thanks again for your great article.

Thanks (4)
ABMS Website Photo
By Michael Abrams
Nov 1st 2017 14:04 EDT

Excellent article. I ALWAYS instruct my business owners to review certain things and not worry about the "trust" issue. There is a difference between trust and good business practices and if the bookkeeper has a problem with that, then maybe he/she isn't the right bookkeeper.

I go one step further: I suggest that the owner have the bank statements, credit card statements, etc. actually mailed to their home...That way the mail cannot be intercepted at work.

I would also suggest doing a "Proof of Cash" style of bank rec. This involves not only reconciling to the correct balance, but also reconciling the intra-month activity. That is, the reconciliation would show that the amount of deposits on the bank statement equals the amount of deposits on the books. Otherwise, the bookkeeper, while not necessarily stealing in the gross sense, could use the company's funds by taking money out, using it and then putting it back in before the statement date.

Furthermore, a prudent business owner should review the bank account online daily to keep up with any suspicious activity.

Again, an excellent article!

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