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How to Prevent Bookkeeping Fraud


When asked, an overwhelming number of small business owners will say that they have placed significant trust in (and place significant responsiblity with) their bookkeeper. They may feel especially close to this person or believe that nothing could ever go wrong. While this sounds like a wise course of action, a large portion of fraud is committed by those closest to the owner.

The Association of Certified Fraud Examiners reports that the average employee thief has worked with the company for four to five years and that nine in 10 are first-time offenders. Most fraud is committed for the benefit of children or family members, and not necessarily for personal gain. This makes it even harder to determine if an individual's character makes them more likely to commit fraud.

There simply is no reliable employee screening method that can be used to prevent hiring a potential fraudster. The only way to stop bookkeeping fraud is to implement internal controls that help deter, prevent and detect fraud. Here are three of the most important steps to take.

1. Divide Job Responsibilities

Many small and mid-sized businesses have a single designated "money guy." They're responsible for paying bills, issuing paychecks, creating the financial statements and handling bank deposits. This type of setup can lead to fraud going undetected for years, as they can either cover their own tracks or simply rely on the fact that no one else is closely checking the books.

Every financial transaction should go through at least two employees. One employee should be responsible for making or collecting the payment. The second employee should be responsible for reconciling the books and verifying that the reported amounts are proper. If you're short on staff, outsourced bookkeeping services can help with the record keeping while leaving your employees to more important tasks.

2. Restrict Manual Payments

Another common form of fraud is where employees making a cash payment take out more than is needed and fail to return the change. Also prevalent is a scheme where an employee with check-writing abilities writes two checks to pay a bill. One check is a proper payment, and a second check is made out in their own name but entered in the books as having been an additional payment on the bill.

Most major suppliers and utility companies now offer automatic clearing house (ACH) payments. If automatic transfers aren't offered, a direct ACH transfer is the next best option, if available. It is virtually impossible to spoof the pay-to account on the bank statement.

When checks must be used, use a bank that lets you create and mail a check online, or use accounting software that prints checks with the payee's name and address, check memo and amount. These checks will automatically be entered into your accounting systems and are more difficult to alter. Any manual checks will raise a red flag for further investigation.

Cash should be replaced with company credit or debit cards whenever possible to create a full electronic paper trail.

3. Review All Reports Monthly

Even when bookkeeping and accounts payable/receivable are done by two different people, a manager should review their work monthly. This reduces the risk of collusion in fraud and will also allow false entries to be detected faster.

When proper controls are in place, this takes little time beyond the work managers should already be doing to monitor the financial health of the company. The manager simply needs to compare the total of the month's receipts and invoices against the amounts entered in the books, and cross-check both figures against the cash in the bank.

Unfortunately, many businesses feel that reconciling accounts and implementing other controls takes too much time. Often, they have previously tried to take steps to get their books in order, but their current disorganization made the task too daunting. Outsourced accounting services can help you get organized, reduce the amount of time it takes to review the financial health of your business and deter employee fraud.

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