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Prevent Fraud With Bookkeeping | Supporting Strategies


Bookkeeping Best Practices: How to Prevent Fraud


Trust the process rather than the person: Here's a systematic way to safeguard your company from fraud with professional bookkeeping.

At Supporting Strategies, we've written before about the heavy toll that fraud takes on small businesses (e.g., a median loss of $200,000 per fraud scheme). And, unfortunately, a new report from the Association of Certified Fraud Examiners warns that the COVID-19 outbreak has led to a 68% increase in fraud levels.

As a business owner, you don't have to accept that staggering losses are inevitable. You can proactively protect your interests by instituting proven financial controls.

Taking Control, Step by Step
The first step in protecting your finances is to adjust your mindset. Implement systems that are process-based, not people-based. You don't have to trust your employees to do the right thing if your system gives them no other option. Here are the practices you need to put in place to accomplish that.

  • Institute cash controls. With so many businesses forced to implement work-from-home procedures, more employees than ever before are operating online. Do you know who has access to your online accounts? Does everyone who has access actually need it? Review your systems and put up barriers (e.g., passwords and PINs) to ensure that only those who must have access actually have it — such as the person you've designated to pay invoices.
  • Create segregation of duties. The employee responsible for releasing any funds, such as the person designated to pay invoices in the example above, shouldn't also record, monitor and approve those transactions. Granted, some small businesses might find this arrangement impractical. If yours is one of those, then you need to insert yourself into the process somehow. Insist that all invoices go through you. Even if you don't study each one line by line, simply being in the loop should serve as a deterrent to any employee who might be tempted to divert funds for their own benefit.
  • Emphasize the month-end close and review. It's vital to conduct reconciliations of all accounts and supporting documents and to perform a thorough review of your financials at regular intervals. Most businesses do this via the month-end close. Again, it's important that more than one person be involved in this process to ensure checks and balances. And again, you need to make it clear that you're among those in the loop.
  • Document all business processes. When you wrote your business plan, did you include your human resources policies, including an employee handbook? If not, it's time you did. Spelling out company policies and procedures sets an expectation that employees are expected to stick to certain protocols. This is especially important when it comes to finances. Make it clear that all transactions need to be documented in a specific way — no exceptions.
  • Secure all documents in the cloud. Paper is your enemy. The old-fashioned way of paying bills by writing checks is ripe for fraud. Electronic funds transfer (EFT) is more secure. Moving all of your bookkeeping to the cloud offers greater security and also enables segregation of duties by allowing remote access to more than one person (including you).
  • Introduce external audits. Perhaps nothing serves as a greater deterrent to employee fraud than the thought of an audit. If you've never conducted one, do so ASAP. Again, it's about setting expectations. You don't need to explain yourself; you can just say something like, "My accountant tells me I need to do periodic audits. The first one is next Monday." And then do it. A fresh set of eyes on your books could be revealing.

Who's the Boss? You Are.
From limiting access to your accounts, to moving your financial records to the cloud, to conducting independent audits, there are plenty of measures you can take to avoid becoming a victim of employee fraud. Remember: It's your business, and ultimately you are in control.

George Stephen


George Stephen

Legal and Tax Disclaimer

This website is created by Supporting Strategies to provide general bookkeeping and accounting information only. Supporting Strategies does not provide tax, legal or accounting advice, and the information contained herein is not intended to do so. As such, the information provided should not be used as a substitute for consultation with professional tax, legal, and accounting advisors, and you should consult with a tax, legal and accounting professional before engaging in any transaction.