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Trust is Not a Control: Accounting Fraud and the Small Business

More than 30% of accounting fraud occurs in small companies and most of it is caused by human error, weak controls and a permissive culture. On average, the loss of capital due to fraud amounts to around $150,000 per incident per small business according to the Association of Certified Fraud Examiners (ACFE). Additionally, it is usually only discovered by accident. However, when it comes to your money it does not matter if these financial inaccuracies were intended or not. This is especially true if you are a small business where cash is key.

Approximately 60% of all accounting errors is a result of simple mistakes in bookkeeping or the misapplication of basic accounting standards. These simple errors can lead to an accumulation of fines and penalties. It can also lead to bad decision making on the business’s part due to reliance on inaccurate financial reports which obscure the business’s actual resources and liabilities.

These common errors are easily preventable. The axiom “you don’t know what you don’t know” lends itself to these types of mistakes. Diligence, on the part of the bookkeeper, is key to accurate and transparent accounting. Practitioners that lack attentiveness and the perseverance to clarify complicated transactions are a liability to your business whether they intend to be or not.

A good bookkeeper is not just an accurate documenter of financial transactions, she is also an advisor and counselor on how you can understand your financial standing and protect yourself from fraud or error. She will show an active concern that you are informed and engaged in the strengths and weaknesses of your financial systems as she, herself, becomes aware of them.

One of the reasons fraud is so common in small businesses is due to a lack of internal controls. This is usually due to the need for employees to wear several hats at one time. See our tips and resources below for help in implementing controls in your business to prevent accounting fraud.

Tips for preventing fraud:

– Do not hire someone based solely upon friendship, family, obligation, or feelings of sympathy. Create a culture of accountability that measures results. Ensure that everyone is aware they are being evaluated based on performance.

– Conduct background checks on potential in-house bookkeepers. Hire based on talent and pay them to perform at a high level of accountability and integrity. It is not worth cutting corners in paying less for for someone who is not experienced and lacks a track record of due diligence.

– Separate the duties between an Office Manager and a Receiving Clerk from your bookkeeper – you don’t want your bookkeeper collecting payments, especially cash, or making purchases.

– Use software like Quickbooks to routinely analyze your accounting data and identify errors.

– Ask to see back up (bank and credit card statements, receipts) for all numbers and entries in your reports.

– Ask for a checklist from your accountant that will help you understand your own part in preventing errors. Review and sign off on bank statements before they are given to the bookkeeper.

– Reconcile all balance sheet accounts and payroll records on a monthly basis.

– Bring in another person to review the books and reconciliations on a random basis.

-ALWAYS follow the policies and procedures that have been put in place – don’t take shortcuts. The tone of accountability is set at the top.


Best Accounting Practices for Creatives

Detailed, accurate accounting practices are important for artists for three major reasons:

  • Income Statements

Income statements are reports that reflect your financial transactions. They tell you everything you need to know about what is most profitable in what you are doing (e.g. selling seashells at the fair using square on your iPhone vs. selling prints on Etsy using PayPal). It shows you where you can afford to raise the price of products and where you can cut unnecessary costs. It tracks the costs of selling your goods or services as well as tracking your more fixed costs like overhead and insurance so you can really see how much profit you are making after all is said and done. Your revenue is affected by trends and your costs will fluctuate, so the income statement reflects the dynamic nature of a small business. It shows you how to adapt and evolve through the life of your business so you can continue to make a profit and avoid gratuitous costs along the way. Income statements are also used to obtain financing should you wish to grow your business and invest in newer equipment or personnel. A great idea will not be enough to convince a potential source of financing to invest in your business; you will need a detailed income statement that reflects the financial reality of your business over a number of years.

  • Deductible Expenses

Tracking all of your expenses in a detailed manner ensures you reap more profit by realizing what constitutes a deductible expense. You may be surprised by what this includes. An eligible expense is defined by the IRS using their form Schedule C as a guide. What can be classified as an “ordinary and necessary” expense varies widely from artist to artist but it should include every item needed to run your business at many levels.

  • Business vs. Hobby

Doing what you can to remain profitable (using the income statement and deducting all eligible expenses) allows you to retain the classification of your art making as a business rather than a hobby, as defined by the IRS. Artists who continually report more of a loss than a profit year after year are “demoted” to hobbyists which can have enormous tax ramifications. In general, you lose the protection and benefits that the classification of being a business awards you. For more detail refer to this in depth article on the differences between art as a hobby vs. a business:

Tips to begin tracking your income and expenses:

  • Keep your personal accounting separate from your business accounting
  • “Income” includes everything from product sales to royalties to awards and so on. You also need to keep track of your sales tax as you will likely be selling your art in various municipalities.
  • Record the description of the item sold, sell date, price, sales tax, total of sale, customer info (name, address, phone, email) and payment method used. Retain 1099’s from vendors for tax purposes.
  • Use form Schedule C as a beginning guide on how to classify your expenses for tax purposes. ( Some of the resources below will provide more detail on common expenses for artists.




Outsourcing Bookkeeping Needs is the Best Option for Nonprofits

Nonprofit organizations benefit significantly from outsourcing their finance and human resource needs. Since nonprofits depend heavily on grants and donors to fund their missions, funds for overhead costs can be scarce. This can also make recruiting and retaining efficient talent difficult.

Outsourcing bookkeeping services provides access to the latest software and business practices that nonprofits are not usually equipped to adopt or implement. These tools increase the quality, security and efficiency of finance and HR services. Outsourced finance firms offer more streamlined procedures because efficiency is how they make a profit. A win-win. Outsourcing firms also provide these extra benefits at a fraction of the cost of recruiting and retaining an employee.

Consultants also provide nonprofits with an extra layer of financial security by creating internal controls. They reduce the risk of sensitive knowledge being taken from your organization when an employee leaves or is terminated. Additionally, they reduce the risk of costly penalties for errors in various types of legal reporting by providing their clients with the latest federal and state regulations in regards to their finance and HR practices.

In conclusion, outsourcing a nonprofit’s finance needs allows them to focus on their sole purpose while maximizing their limited funding.


  • A Study Conducted by the Management Assistance Group In Partnership with the Eugene and Agnes E. Meyer Foundation; Outsourcing Back-Office Services in Small Nonprofits
  • Nonprofit Coordinating Committee of New York: A Nonprofit Guide to Outsourcing, October 2012

Kim Rohrer on Startup HR

Kim Rohrer, a former colleague from San Francisco, spoke with Software Advice on how she built an HR Department from scratch. One of the benefits of growing a team member in to a new role is that the culture of the company is baked in to every part of the function.

She also talks about transitioning from a ‘completely flat hierarchy’ and ‘laissez-faire management.’ Kim helped promote employees and create departments to streamline communications and unburden the CEO.

She also cautions to ‘expect the unexpected’ when transitioning from Lean Startup to Expanding Business. The transition can be hard for all employees at the company, so having a talented and dedicated HR person is essential.