“Trust but Verify”, was a phrase made famous by U.S. president Ronald Reagan when discussing U.S. relations with the former Soviet Union. The same should apply to a small business owner’s relationship with their bookkeeper.
According to the Association of Certified Fraud Examiners, the smaller the company, the more likely fraud will ruin your business. http://www.acfe.com/rttn-highlights.aspx They noted that small companies typically employ fewer anti-fraud controls than larger companies, which increases their vulnerability to fraud. You may not be able to hire an internal auditor to help you catch a bookkeeper that is stealing from you, but if you put the following these five recommendations you will greatly reduce the chance for bookkeeping fraud and possibly eliminate it completely.
Review the Bank Statement
Open the bank statements and reconcile the bank account yourself every month. If you don’t have the time or the expertise to reconcile the account, look through the cancelled checks for any unknown vendors and look for unusual ACH payments. Even if you sign all of the checks personally, your bookkeeper can transfer money to his own account or setup ACH payments to his friends and family. Question your bookkeeper about one or two payments. Ask him even if you already know the answer. Also ask to see the supporting documents. If a bookkeeper is thinking of writing a fraudulent check or sending a fraudulent wire, he will certainly think twice about it if he knows you review the bank statement.
When I was a controller in a multi-site corporation, with hundreds of million dollars in revenue per year, the CEO and President of the company would frequently review the accounts payable register and would occasionally ask me questions about invoices that were due to be paid. I thought at the time that the CEO should have too much time on his hands to be involved is such mundane tasks as reviewing the AP register, but just knowing that someone else was looking at the report made me more aware of the invoices that were entered.
Close prior periods
Once you close a period, preferably a monthly period, lock the period with password protection to prevent any transactions from posting into prior periods and make sure you or your outside accountant or auditor are the only ones with access to the password. An easy bookkeeping trick is to hide fraudulent activity in prior periods that are not normally reviewed again. If you review your financial statements monthly, you may notice a $5,000 expense that a bookkeeper paid fraudulently but you are unlikely to notice it if the bookkeeper enters the expense into last month’s books, or last year’s books or the books from two years ago.
You probably have enough to do already and don’t have time or the need to look at financial statements from previous periods. A bookkeeper that is stealing from you knows that. Besides, closing your prior periods is an accounting best practice to prevent both intentional or unintentional posts to prior periods.
Review the Payroll Register
If your bookkeeper processes your payroll, you should review the payroll register every pay period for unauthorized pay increases not only to your bookkeeper but also to her friends. Review it every pay period because a sneaky bookkeeper could raise their pay for one payroll and change it back before the next one for a one time bonus. She could also wait until you are on vacation or on a business trip to make the change.
Review Credit Card Statements
Although it may not add up to a lot of money, I think one of the easiest ways for a bookkeeper to steal from you is with the company credit card. Because of the cryptic descriptions in the statements, it can be difficult sometimes to tell the source of a credit card charge and if the charge looks legitimate or not. If you send your bookkeeper to the office supply store for paper, you won’t know that he also charged a printer or computer unless you review the receipts. I have seen credit card charges for strip clubs, spas and online dating sites. If you at least scan your statement monthly, you will be able to catch most of the big-ticket items.
Separation of Duties
You may have a very small staff, but as much as possible don’t let you bookkeeper do everything in the office. For example, you can assign someone else to pickup and open the mail. Have that person make a deposit list of the checks received and compare it to the actual deposits in your bank account. Don’t let your bookkeeper have sole control over printing checks, signing checks and reconciling the bank account. Unless you have some oversight you are asking for trouble. If your staff is small and your time is limited, you can hire an outside accountant to perform certain tasks for you. If you bookkeeper knows you have a second set of eyes looking at her transactions, she will be less likely to steal.
A bookkeeper is in a position of trust and you should be allowed to trust him to take care of your finances, but it is your name on the door and ultimately it is your responsibility to make sure your business finances are handled properly. Follow these five recommendations to help greatly reduce the likelihood of your bookkeeper stealing from you and possibly shutting down your business.
If you have any other ideas to prevent or discover bookkeeper fraud, please describe them in the comments section.
[schema type=”person” name=”Steve Webster” city=”Jeffersonville” state=”Indiana” postalcode=”47130″ ]