Bookkeeping fraud can have a significant impact on a business’s profits. The most common victims of bookkeeping fraud are companies with less than 100 employees, as these companies often lack the accounting control measures needed to prevent fraud. Because these businesses are so small, bookkeeping fraud can bring them to their knees. For this reason, it’s important to understand the types of fraud schemes, how to recognize them and how to prevent them from hurting your business.
Types of Fraud Schemes
Employees can engage in various types of bookkeeping fraud. The most common fraud schemes include:
Cash on Hand
Financial Statement Fraud
Signs of Bookkeeping Fraud
Complaints - Complaints from customers or vendors can sometimes indicate bookkeeping fraud. For example, if a vendor is complaining that employees repeatedly send him the wrong checks or checks for less than the full amount owed, bookkeeping fraud is a possibility.
Tips from employees - In some cases, business owners may learn about fraud because of tips from employees who have witnessed their coworkers committing crimes.
Odd employee behavior - Employees who come into work too early, stay too late or exhibit signs of nervousness around management may be committing fraud.
Employee lifestyle cues - Although other explanations are possible, employees who suddenly seem to be living far beyond their means may be stealing from an employer.
Accounting discrepancies - Red flags in the books, such as unrecorded transactions or inventory shortages, may indicate a possible fraud problem.
Impact of Bookkeeping Fraud in Recent Times
Bookkeeping fraud affects countless companies worldwide every year. Employees who commit fraud can steal a great deal of money before they are caught. For example, the Bradenton Herald reports that an employee was recently able to approximately $17,000 from her employer over Christmas vacation. To make matters worse, this same criminal had already been convicted of embezzling over $400,000 from a previous employer while working under a different name.
The incident in Bradenton is hardly isolated, and the amount stolen is relatively low when compared to industry averages. In fact, a recent study completed by the Association of Fraud Examiners indicated that companies with less than 100 employees experience a median loss of $147,000 per year when fraud employees are involved in fraud schemes. This adds up to an estimated overall loss of $3.5 trillion worldwide as a result of bookkeeping fraud. Furthermore, the study found that companies with less than 100 employees, which are the most common victims of fraud, make up 97 percent of all companies in the world. Perpetrators of fraud are most often lower level employees, followed by employees in management and business owners.
Preventing Accounting Fraud
In addition to examining the current impact of fraud on small businesses, this study also explored methods used to prevent bookkeeping fraud. According to the data produced by the study, one of the best methods of preventing fraud among employees is the use of accounting controls. In fact, it is estimated that good accounting controls could save businesses as much as $40,000 per year in fraud losses.
However, many smaller businesses are unable to enact high-quality accounting controls on their own. With limited funds and a relatively small number of employees, these businesses often rely on internal accounting systems that lack any form of fraud detection. Fortunately, small businesses can increase accounting controls and prevent employee fraud if they invest in collaborative accounting. With a collaborative accounting system, a business’s bookkeeping and accounting needs are outsourced to a third-party provider who works hand-in-hand with the business to ensure that all records are up-to-date and accurate.
At Reckenen, we offer comprehensive collaborative accounting services that include a full bookkeeping staff with fraud prevention. In addition to completing standard accounting and bookkeeping tasks, we also reviews your businesses key performance indicators regularly to ensure that no fraud is taking place among your employees. Because our services are collaborative, the lines of communication are always open, and you will know immediately if we discover any questionable behavior or activity. To learn more about what Reckenen’s collaborative accounting services can do for your business, contact our team today.
Download this infographic.