Bookkeeping Crimes: Just One of the Good Reasons We Recommend the Segregation of Duties

Examples of What Happens When Businesses Rely too Heavily on their “Trusted” Bookkeeper

(See Below for Tips to Prevent this from Happening to Your Business)

TIPS ON FRAUD PREVENTION

STRENGTHEN INTERNAL CONTROLS AND RISK MANAGEMENT

Implement Adequate Internal Controls

• Know It Can Happen to You – “I trust my bookkeeper” is heard thousands of times after most cases of embezzlement.
• Trust But Verify – It is okay to trust your employees, but an adequate control structure will help you verify that what you think is happening is actually happening. One-third of business failures occur as a result of fraud.
• Run All Cash Receipts Through a Business Bank Account – While it may seem easier to utilize cash out of the drawer to pay for petty cash, this process creates an environment where funds can easily be misdirected.
• Create Segregation of Duties – Make sure you have different people setting up and approving new vendors, approving bills to be paid, writing checks/initiating ACH’s, issuing invoices, receiving cash, recording cash, approving new employees, entering new employees, approving pay rates, changing pay rates, processing payroll, reconciling the bank accounts and credit card accounts.
• Review Bank Statements and Credit Card Statements – In the paper-based world it is recommended that business owners receive the unopened bank statements directly.  In the electronic world, business owners can view bank records online monthly and set-up alerts to notify them of any large or unusual transactions.
• Have a Third Party Accounting Firm Review Your Books Regularly – This routine review can serve as a significant deterrent to your employees.
• Understand Your Numbers – Review your financial results as compared to budget monthly. When you have financial clarity, it is much easier to identify unexpected expenses incurred as a result of fraud by a bookkeeper.
• Manage Your Books on an Accrual Basis – In order to eliminate the variations that occur when using the cash basis of accounting (recording revenue when cash is received and expenses when checks are cut), utilize the accrual basis of accounting (revenue when earned and expenses when incurred).  This will help you identify unexpected results.
• Reconcile Your Balance Sheet Monthly – While most understand the importance of reconciling bank accounts monthly, all balance sheet accounts should be reconciled on a monthly basis. It is important to make sure that all transactions on the balance sheet are appropriate, and that these transactions do not mask the results presented in the income statement.
• Perform In-depth Background Checks on Finance and Accounting Staff – All staff that are involved with managing the books and records of a business need to be properly screened. This includes employment history, credit checks, address history, bankruptcy history, and criminal and civil court records. Many bookkeepers caught in a fraud are not prosecuted, and as a result they move on to their next victim.  A full background screen will help you understand whether a prospective employee fits into a high risk or low risk category.
• Ensure Books and Records are Securely Stored – Make sure you close each financial period and that transactions from the past can not be altered. This requires locking periods in the accounting software, and locking up records, whether electronically or on paper.
• Eliminate or Lock Up Check Stock – By utilizing electronic payment systems, it is harder to destroy or hide important documents. When paper is used, make sure all check stock is accounted for by management.

While it is impossible to eliminate all risks associated with internal and external fraud, the above internal control steps will significantly reduce the risk that fraud will occur at your organization. In addition to these steps, organizations should implement an adequate Risk Management Program as discussed below:

Implement a Risk Management Program

• Set the Tone at the Top – Senior management should make it clear through their words and actions that all forms of dishonesty are not tolerated.
• Protect Against Downside Risk – Review your insurance coverage annually to ensure you are protected against internal thefts and external thefts.
• Hire Protected Vendors – Make sure your accounting or bookkeeping firm is adequately bonded.
• Work with Vendors with High Integrity – Interview your bookkeeping firm or accounting firm about their hiring practices. Make sure they are adequately screening the staff who will be working on your books and records.