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.

Resources:

http://www.theneworleansadvocate.com/features/carnival/10182954-171/bookkeeper-embezzled-715000-from-charity

http://www.accountingweb.com/practice/practice-excellence/accounting-fraud-prevalence-and-prevention

http://www.accountingweb.com/aa/law-and-enforcement/accounting-errors-fraud-are-common-problems-for-small-businesses

http://www.entrepreneur.com/article/227689