Small Business Accountants since 1991

Tell-tale Signs of Bookkeeper Fraud

bookkeeper on phoneMisappropriation of funds and assets by employees is widespread, and can be committed at any level by any employee – and in many different ways. So what are the signs that your bookkeeper may be fleecing you?

Fraud that occurs in small businesses is normally fairly simple and opportunistic and, whilst the amounts involved may not be on a headline-making scale, they are often significant enough to cause the business serious financial hardship, and even failure. Dishonest bookkeepers tend to milk their employers over a long period, little and often. Here are some of the schemes:

 

Bank

An employee writes a company cheque payable to cash, or to a private expense of his or her own such as a credit card or personal utility bill. A legitimate company expense is falsely recorded on the cheque stub, so that the bookkeeper posts the debit to a company expense account. The bank statement reconciles, and the payment is charged as an expense in the end of year accounts.

A variation of this is to use the company debit card or make an online payment.

Credit Control

Those responsible for collecting debts and bringing in money can find temptations.

A typical scam is ‘lapping’. Here an employee receives payment from a customer and transfers the money directly into his or her own pocket. When a second customer makes a payment, the employee credits the first customer’s account. This can potentially be repeated time and time again, making it very difficult to unravel the overlap. In effect the employee achieves a permanent loan, which he or she is unlikely to ever repay.

Other possibilities are an employee posting fictitious credit notes or other non-cash reductions to a customer’s account and pocketing the cash, or altering the amount on a sales or work invoice and pocketing the difference. It is comparatively easy for a fraud to be committed where just one person is responsible for the entire accounting function or a substantial part of it. Division of duties between staff reduces the chance of fraud, providing those staff do not collude with one another.

Purchasing and Payroll

The department responsible for paying out money also offers opportunities for fraud.

For example, an employee might invent a non-existent supplier and pay fake invoices for an account that is basically his or her own. If questioned about the goods or services received, he or she might invent a cover story, such as goods being damaged, used up, or being stored off-site.

Inventing fictitious employees on the firm’s payroll offers similar possibilities.

The Tell-tale Signs of Bookkeeper Fraud

1. The High Life: You know what your bookkeeper earns, so does his or her lifestyle match their financial circumstances? If your bookkeeper drives an expensive car, wears expensive clothes, or lives in a house beyond his or her income bracket then you have your first red flag.bookkeeper lording it

2. Missing Paperwork: If your business records seem always to be mis-filed and your bookkeeper is always promising to find them and have them on your desk soon, then that’s another alarm bell. If your suppliers often write about missed or disputed payments, or government departments write about payments that have apparently gone astray, then ask yourself whether your bookkeeper really can be that hopeless; or clever at covering-up.

3. Increased Responsibility: If you have an eager-beaver, volunteering to take on extra duties and responsibilities in key areas such as dealing with your bank, HMRC, your creditors, and especially opening the mail then you may have the early signs of a problem. Assuming sole responsibility for any of those areas means your bookkeeper can operate unrestricted, without fear of you or other staff spotting any cover-ups.

4. Busy Bee: The larger the role in your financial affairs, the easier it becomes to defraud you. If your bookkeeper starts assuming your accountants’ role, for instance by producing quarterly or annual accounts “to save you the expense” then you have to wonder what’s going on. It’s very easy for a bookkeeper to fudge balances on accounts to cover-up deficiencies, and unless your accountant audits your accounts then the chances are such cover-ups will go undetected.

5. Division of Duties: Having dual-control over a key function such as banking and bookkeeping usually acts as a deterrent. For example, dividing the key financial areas of credit control, banking, and bookkeeping between two or more different staff members helps deter fraud, as staff keep an eye on one another’s’ work. If your bookkeeper is in sole charge of such key financial functions, then you are exposed to cover-ups of fraud and error.

6. No Holidays: If your bookkeeper is always at his or her desk, rarely takes time off, and seems reluctant to go away on holiday then perhaps there’s a red flag reason. Many fraudsters’ activities come unstuck when they’re away for a whole week or fortnight. Is your bookkeeper really such a workaholic, or is he or she reluctant to be prised away from the office for fear of being discovered in their absence?

7. Vices: Does your bookkeeper show signs of drink, drugs, or gambling problems? Is there any evidence of matrimonial or family financial problems? Of course, many people have such problems from time to time. However, any sustained issues should perhaps start your alarm bells ringing.

8. Nothing Stacks Up: If profits consistently fall short of your expectations, or you seem to be constantly struggling to make ends meet with cash-flow, then maybe its time to call in outside help.

Internal Controls

There are a number of ways to protect against financial fraud. Here are a few simple suggestions:

* Try to divide key duties between different members of staff and, where possible, rotate them. Consider outsourcing the bookkeeping function to an accredited firm of bookkeepers or accountants.

* Watch out for unusual requests from the person in charge of the accounting function.

* If an employee is unusually protective of certain tasks, then they may have something to hide. For example, is there a reason why your company bookkeeper or accountant always insists on doing the banking himself rather than delegating it?

* A marked change in cash-flow or profit levels during an employee’s holiday can indicate a fraud. Similarly, a member of staff who never takes a holiday may be trying to cover an ongoing fraud.

* Signed cheques are a licence to print money. Blank cheques and cheques without the payee name completed should only be signed on exceptional occasions.

* Management should always retain a degree of control, which could be exercised in the signing of cheques or passing of invoices for payment.

Although these suggestions seem obvious, you would be surprised how often they aren’t implemented.

It Happened to Us

Over the years, we at Taxsmiths® Accountants have discovered a number of cases where inventive staff have been left in sole charge of key accounting functions, and have taken advantage by systematically milking their employers. Those cases include:-

* The cashier/bookkeeper of an independent sports equipment shop: – who wound back the till roll each evening after the other staff had left, and re-keyed the day’s takings into the till leaving out many of the cash sales;

* A general manager of a sizeable building contractors who also kept the firm’s books: – he was caught supplying the materials of his self-build housing project for six executive houses;

* A coalition of the purchasing manager and bookkeeper at a large engineering firm:- they grossly overpaid suppliers’ accounts in return for “kickbacks”.

They say prevention is better than cure, and adopting internal control measures now is a sound policy. Taxsmiths® offer a bookkeeping service that dovetails with your staff’s existing collection, payment, and banking routines, providing a division of duties that acts as a strong deterrent to dishonest activity.

© Taxsmiths® 2015

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