Professional bookkeeping best practices, such as segregation of duties, could have prevented these real-world cases of fraud.
My colleague George Stephen has published a list of bookkeeping best practices that allow business owners to proactively prevent fraud. These measures include instituting cash controls, segregating duties, conducting a thorough month-end close and review, eliminating paper checks and running regular audits.
I can't think of a better way to illustrate the value of George's excellent advice than by looking at three recent cases of fraud — and highlighting the steps a more proactive business owner might have taken to prevent them.
Case No 1: Credit Card Fraud
The scam: The bookkeeper at a Tennessee tractor repair firm illegally used the company credit card to make over 200 unauthorized purchases totaling over $21,000 in less than a year. Purchases included groceries and personal utility bills. Also, the bookkeeper added her daughter to the company's health-insurance policy without permission, which resulted in an additional loss of more than $3,000.
The bookkeeping fix: The business owner could have prevented this theft by not allowing anyone access to the company credit card. In addition, the business owner (or a third party without credit card approval) should have reconciled the credit card and bank accounts to look for any suspicious charges. (In addition to safeguarding against embezzlement, this practice would also alert the business owner to possible cybersecurity breaches.)
Lastly, the business owner should have conducted an insurance policy census to detect the names of non-employees.
Case No. 2: Draining the Company Checking Account
The scam: The longtime office manager for a general contractor in Virginia stole almost $720,000 over a three-year period by writing checks to herself and diverting funds to 16 other people using the company's account. The fraud only came to light when the business owner received a notification from the bank that his business account was overdrawn.
As is so often the case, the family-run business suffered an emotional blow as well as a financial one, with an attorney noting that the office manager "completely broke the trust that the family had in her after she had become very close with them over the years."
The bookkeeping fix: The business owner could have prevented this through segregation of duties. The office manager had sole responsibility for writing checks, with no oversight. This case is also a cautionary tale of why businesses should use an outsourced bookkeeping team rather than delegate bookkeeping responsibilities to someone who holds another position within the company, such as office manager. A system in which one person writes the checks and another reviews the invoices would have prevented this.
This case also provided a good argument for transitioning away from paper checks to electronic funds transfer (ETF), which is more secure.
Case No. 3: The Repeat Offender
The scam: In Massachusetts, a bookkeeper at a construction company was charged with one of the more brazen cases of embezzlement we've ever heard of. The bookkeeper was accused of crimes including forging the company owner's signature and embezzling $270,000 from company bank accounts in a span of just two months. She also drew more than $6,300 in unauthorized payroll after she was fired. And now the real kicker: All of this occurred while she was under indictment for embezzling $1.1 million from a previous employer.
The bookkeeping fix: Had the owner conducted a simple background check, the bookkeeper's previous indictment would have come up. Our previous example illustrated what can happen when a longtime employee yields to temptation; this is an example of why you need to conduct basic due diligence before hiring a bookkeeper (or any employee, for that matter) in the first place. And why it's sound advice to look for a bookkeeping services provider that has an established reputation.
It's human nature to be trusting of those we spend a lot of time with, especially in a small-business environment. But if you're ever been tempted to relax these proven procedures, just remember these real-world cases of fraud. A proactive approach to bookkeeping best practices will not only protect your financial assets, but also guard against your employees giving in to temptation.