Unsavory bookkeepers commonly embezzle their client’s or employer’s company funds through the following means:
- Acquiring debit cards, credit cards, or lines of credit in the company name through illicit methods — such as making false representations to financial institutions — and then using the cards and credit lines without authorization
- Making withdrawals from a company account without consent — especially via wire transfer, check, or cashier’s check — through forgery, abuse of signatory authority, or other misrepresentations
- Forging endorsements on checks received by the company from customers
- Manipulating pre-signed checks
- Receiving cash back from deposits without permission
- Falsifying hours worked or issuing fraudulent payroll checks
So how do unscrupulous bookkeepers get away with such seemingly unsophisticated schemes, and what can Certified Fraud Examiners do to protect their small business clients from falling victim?
Many small business owners are so wrapped up in managing the day-to-day business operations that they neglect to pay much attention to their business finances. Others don’t understand the financial side of running a business, and many lack the necessary resources to hire sufficient staff to implement adequate separation of duties. Finally, too many small business owners place undue trust in their bookkeepers.
It is not uncommon for a small business owner to have one bookkeeper, usually a part-time employee or independent contractor, who handles all or most bookkeeping and accounting matters. The sole bookkeeper is usually responsible for payables, receivables, payroll, account reconciliations, financial statements, and banking matters — anything and everything pertaining to the finances of the business. This person is frequently given open access to company financial information, and is often tasked with handling the small business owner’s personal finances. As convenient as it may be to assign this much control of business and personal finances to a bookkeeper, however, it leaves small business owners vulnerable to myriad fraud schemes.
Clients can implement certain safeguards. At a minimum, small business owners should:
- Conduct a background check on their bookkeeper, including a credit check, reference check, and criminal background check.
- Discontinue receiving paper bank, credit card, and loan statements, and, instead, access them online, and print them out for their bookkeeper. If online access is unavailable, small business owners should have statements mailed to their home.
- Review their bank, credit card, and loan statements thoroughly for suspicious transactions prior to turning them over to their bookkeeper. In examining bank transactions, they should view the front and back of checks for forgeries, phony endorsements, or other questionable transactions. Also, they should scan the front and back of deposit slips, especially for any unauthorized “less cash” amounts.
- Take a bookkeeping course to gain a general overview of the process so that they are not completely in the dark.
- Gain a basic familiarity with their accounting system and the various reports that it generates. In addition, they should run and review reports — especially bank reconciliations, financial statements, payroll reports, and aging reports — regularly for suspicious transactions.
- Learn how to perform a bank reconciliation, and perform the reconciliations themselves; or, at a minimum, thoroughly review them.
- Make their own bank deposits.
- Open all mail themselves.
- Never give signatory authority on their bank accounts to their bookkeeper.
- Personally sign all prepared checks, and never sign blank checks.
- Maintain control over their check stock, and not allow their bookkeeper unlimited access to it.
- Change accounting system, banking, and other relevant passwords immediately upon resignation or termination of their bookkeeper.
- Bring in a Certified Fraud Examiner skilled in forensic accounting to investigate any suspicious activity.
- Have a Certified Fraud Examiner with a solid accounting background perform a periodic review of their accounting records.
- Get to know their bookkeeper and watch for any questionable behavior, lifestyle changes, financial problems, addictions, etc.
- Not provide one bookkeeper with access to both their business and personal financial information. If need be, they should consider using two part-time bookkeepers rather than one full-time bookkeeper.
Never place undue trust in their bookkeeper, regardless of how upright he may appear or the amount of time he has worked for them. Doing so is unnecessary and unwise. Honest bookkeepers should understand and encourage small business owners’ needs to protect themselves and their businesses.