Are You a Victim of Small Business Bookkeeping Fraud?

Billing schemes. Skimming. Check to tamper. Small business bookkeeping fraud is a real risk for entrepreneurs of fewer than 100 employees. As a small business owner, you may have implemented procedures to prevent bookkeeping fraud. However, nothing is 100% guaranteed to work. Median fraud loss for small businesses is $200,000 and fraud can be committed by any level of employees and in so many different ways.

Fraud that occurs in small business bookkeeping is normally fairly simple and opportunistic and, whilst the amounts involved may not be on a headline-making scandal, they are often significant enough to cause the business serious financial hardship, and even failure.Are Your records constantly misfiled? Are you constantly missing records & paperwork?

To avoid taking that kind of loss, you need to be able to spot the warning signs of small business booking fraud early on. Here is what to look for.

Identify High-Risk Employees

An employee committing fraud has something to hide and their behavior may seem particularly suspicious. Being closed off, secretive, and defensive are common characteristics of employees committing fraud.

One common clue that small business owners should look out for is if the employee won’t take time off for a holiday or at all during the year. This could indicate they are fearful of someone taking over their duties and discovering the fraud. Some fraudsters, on the other hand, will try to cover up their improved financial status with a new car or home, for example, with tales of a lottery win or inheritance.

In addition to employees acting suspiciously, high-risk employees might also include those:

  • struggling with debt
  • dealing with skyrocketing bills because of unfortunate circumstances (divorce or a family member’s poor health)
  • with a history of drug abuse
  • involved in risky financial ventures (gambling or investments)

If an employee has a motive to commit fraud at work, think of the above behaviors as red flags.

2. Too Much Access and Not Enough Oversight

Median Fraud loss for small businesses is $200,000
Fraud can be committed by any level of employees and in so many different ways.

Many small business owners put trusted friends or even family in charge of small business bookkeeping. If you delegate too much financial control to one employee, your company is already at much greater risk of being defrauded. For example, no single employee should be responsible for authorizing payments and tracking expenses.

Lack of internal controls creates the greatest opportunity for loss. Having set internal controls, especially segregation of duties, make a major difference in combating fraud. However, putting controls in place and applying them consistently is often overlooked because  “employees are trustworthy and would never do that,” or “we just don’t have the time or staff to do that.” That is, until it happens to you.

A strong, healthy framework of internal controls can provide small businesses benefits such as:

  • Improving the reliability of financial statements
  • Promoting efficiency
  • Enabling a quick reaction to a dynamic competitive environment
  • Aligning your small business towards achieving its profitability goals
  • Keeping your business on track to accomplish its mission

3. Cash Flow Takes a Dive

If your small business has been running at the same level as it usually does, but you notice your cash flow has suddenly dipped, you may want to look closer into your daily operations. Is there really less cash coming into the business, or is it ‘leaking’ out somewhere along the way? Luckily, it shouldn’t take much to uncover this problem. Most businesses generate relatively predictable levels of cash based on how many customers they have. This can be determined by checking invoices sent out to customers.

Low balances seem like an obvious sign of skimming, but it is important to keep in mind that honest mistakes can happen. This includes both incorrectly counting money and incorrectly entering sales as higher than they actually were. High balances could be an indication that an employee is trying to make up for a past fraud. They could also just be a sign that the employee needs more training in proper cash handling and record keeping.

We recommend small business owners do regular checks on their small business bookkeeping to make sure things are trending normally.

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4. Missing Paperwork

Are your records constantly misfiled? Is your bookkeeper constantly scrambling to find missing records and paperwork? This is another alarm bell for small business bookkeeping fraud. If your suppliers often write about missed or disputed payments or government departments write about payments that have apparently gone astray, then ask yourself whether your bookkeeper really can be that hopeless; or clever at covering-up.

Noticing Fraud Signs? Here is What You Should Do.

If you spot warning signs of potential bookkeeping fraud, remember that there is often an honest explanation that is more likely than the fraud. Approach the employee in a non-confrontational manner by asking them to help you better understand the transactions in question.

Outsource Your Accounting to Reduce Fraud Risks

Outsourced accounting services is one of the easiest ways to avoid and outsmart fraud. Outsourcing addresses the causes of fraud, such as messy books, overwhelmed and understaffed employees, and under the optimization of QuickBooks.

Outsourced accounting services also provide an immediate separation of accounting duties that provides peace of mind to a busy, small business owner. Additionally, your outsourced accounting providers reputation and ability to stay in business rides on their integrity and ability to 100% accurately manage books.  Fraud happens and no accounting system should ever run on employee trust alone.

Final Thoughts

Now that you have some ideas on how to spot the most common warning signs for small business bookkeeping employee fraud, it’s important your management team take steps and implements separation of duties to combat it.

Watch for suspicious behavior, segregate financial roles so no one has unlimited access, control, or opportunity – and ensure your bookkeeping is always up to date so any “red flag” scenarios can be dealt with promptly.

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