Protect Your Business from Bookkeeping Fraud

by FEI Daily Staff

Best practices for significantly reducing risk within your organization.


Countless headlines show instances of what can happen when businesses rely too heavily on their “trusted” bookkeeper. Instances of embezzlement and theft can carry on for decades before being uncovered, and often have a devastating impact that can put the entire company at risk. While it is impossible to eliminate all risks associated with internal and external fraud, following best practices can significantly reduce risk within your organization.

Implement a risk management program

The first step to reducing your company’s risk of fraud is to implement a risk management program. Senior management needs to make it clear—through their words and actions—that no forms of dishonesty are tolerated. For best practices, review your insurance coverage annually to ensure you are protected against internal and external thefts, and make sure that your accounting and/or bookkeeping firm is adequately bonded. In addition, interview your accounting and/or bookkeeping firm about their hiring practices to make sure they adequately screen their staff.

Trust but verify by implementing adequate internal controls

While successful businesses foster a culture of trust, implementing adequate control structures can verify your employees’ actions. In order to reduce fraud and error risks, create a segregation of duties by dispersing business functions to more than one person or department. For example, have different people set up and approve new vendors, approve bills to be paid, write checks/initiate electronic payments, approve new hires, approve and change pay rates, process payroll and reconcile the bank and credit card accounts.

All staff involved with managing the books and records of a business should be properly screened. Check their employment, credit, address and bankruptcy history as well as criminal and civil court records. Many bookkeepers caught in a fraud are not prosecuted, and as a result they move on to their next victim. A full background check will help you understand whether a prospective employee fits into a high risk or low risk category.

Understand your numbers

With financial clarity, it is much easier to identify unexpected expenses or balance sheet issues that are incurred because of fraud by a bookkeeper. That’s why it is important to reconcile your balance sheet and review your financial results as compared to budget monthly. Make sure to:

  • Run all cash receipts through a business bank account. While it may seem easier to utilize cash out of the drawer to pay for petty cash, this process creates an environment where funds can easily be misdirected.
  • Review all bank and credit card statements. In the paper based world, it is recommended that business owners receive the unopened bank statements directly. In the electronic world, business owners can view bank records online routinely and set up alerts to notify them of any large or unusual transactions.
  • Have a third-party accounting firm review your books on a regular basis. A routine review from an outside accounting firm can serve as a significant deterrent to fraud.
  • Manage your books on an accrual basis. To eliminate the variations that occur based on the cash basis of accounting (recording revenue when cash is received and expenses when checks are cut), utilize the accrual basis of accounting (recording revenue when earned and expenses when incurred). This will help you identify unexpected results.
  • Balance your balance sheet monthly. While most business owners understand the importance of reconciling their bank accounts monthly, it is just as important to reconcile all balance sheet accounts monthly. Make sure that transactions on the balance sheet are appropriate, so inappropriate items within these balances do not mask the results presented in the income statement.
  • Ensure books and records are securely stored. Whether your records are kept electronically or in paper form, make sure you close each financial period and lock up records so past transactions cannot be altered.
  • Eliminate or lock up check stock. By utilizing electronic payment systems, it is harder to destroy or hide important documents. When paper is used, make sure all checks are accounted for by management.
Fraud occurs more often than most businesses realize. By utilizing accounting best practices, not only will you deter an employee from committing fraud, you will obtain a clearer view of your businesses’ finances.

Ted Rose is the president and CEO of Rose Financial Services (RFS).