Prevent Bookkeeper Fraud

How to prevent becoming a victim of bookkeeper fraud

A recent report in a local Bournemouth newspaper has reinforced the need to be open about a genuine problem that exists for local SME businesses:

How do you detect, or preferably avoid, fraud being committed by your own finance staff?

This is a nightmare scenario for any business owner, potentially having serious consequences for your ability to pay suppliers, your other staff or even continue trading at all. Finance is a particularly dangerous area as it is largely electronic, meaning it is harder to notice than theft of physical product or equipment, especially if the culprit is also responsible for producing your reports which they can falsify to mask the true situation.

In terms of detection of a fraud in progress, the most likely factors you’ll notice are human ones in the behaviour of the perpetrator. Signs of stress or unusual behaviour in finance staff should be an immediate warning sign and looked into closely. Of course, this is not in itself an indication of any wrongdoing and you should always treat any employee with kindness and consideration, rather than immediate suspicion, but you should have a mechanism to discreetly check to put your mind at rest.

Often personal or family circumstances are the driving factors behind employee fraud, rather than any malice against their employer so you shouldn’t assume that a loyal employee who enjoys working for you isn’t capable of this sort of act. These factors are often a more powerful motivation and they are unlikely to be ones your employee will feel comfortable sharing with you.

There is obviously a link here to HR policy so it’s worth ensuring that employee contracts have clauses that allow you to make reasonable investigation (things like use of CCTV, the right to look through a personal bag brought to work premises or the ability to inspect computers). There are some significant grey areas here, such as whether you can access the personal email account of an employee if they have used it on a work-issued computer or phone). If an employee seems suddenly evasive or reluctant to share information with you in the way they normally would, this is also a red flag that something may be amiss.

So what preventative actions can you take?

There are three steps you can take to protect your business from bookkeeper fraud.

Review your internal controls

Internal control is a wide-ranging accounting term that covers all your policies, processes and systems. There are checks and balances that an experienced financial controller can put in place to ensure no one individual has too much authority, whether it’s by requiring transaction counter-signatures or setting up safeguards within your software systems.

Create separation of duties

Many small businesses need to keep employee overheads to a minimum and thus there is a temptation to allow a bookkeeper complete control of the entire end-to-end process. But this carries a huge inherent risk. Get help in understanding how to achieve this if you need it, or in training another staff member to take on a part of process and share the responsibility. It is much harder to commit a co-operative fraud between multiple people.

Ensure you have a mechanism for effective oversight

You may not even be able to trust the management reports you’re being given if they are prepared by someone engaging in fraudulent activity. You can achieve peace of mind by having regular (but unannounced) financial audits undertaken by an external 3rd party.

The truth is that the temptation to attempt fraud is often governed by how easy people believe it will be to get away with it. If employees know you have no measures in place to prevent fraud, then there is always the danger an external catalyst will mean they turn a thought that they “could” into an actionable belief that they “can”. Likewise, if they know that scrutiny is paid to fraud prevention the possibility of committing it for real will never take hold in their mind in the first place.

If you’d like to understand more detail about how you can implement these sorts of protocols, why not come along to my Business Finance Club. It’s based in Dorset, meets monthly and is a friendly forum for business owners and accounting professionals to share knowledge. You’d be most welcome to join us.

Alternatively, if you’d just like to chat on a 1-1 basis then my door is always open. Do get in touch.