Small Businesses More Susceptible to Fraud

Most of us are aware that fraud is on the rise, and businesses are not immune to the fraud epidemic. Small businesses are affected more than large corporations. It can be more difficult for a small business to regain their loss, as they do not have the same fraud prevention tools and controls as a large company. 

While it is almost impossible to stop all fraud, there are some things you can do through your accounting team that help detect or possibly prevent fraud.

One of the first places you want to watch is within your own organization. Many instances of fraud happen through your in-house bookkeeper, especially the accounts payable clerk. This is a trusted position that has access to all company funds. They can create journal entries hiding fraudulent transactions, duplicate checks to vendors or even use the company bank accounts to generate electronic payments for their personal bills. Having proper oversight can help detect or even prevent these instances of fraud. 

A common way to hide fraud is through journal entries. A journal entry is a two-sided entry moving money from one account to another. It is a powerful accounting tool but can also be used to hide money or errors. Journal entry accounting is outdated and prone to human error. 

Automation in an accounting system can help remove almost the entire need for journal entries except end-of-year adjustments from the CPA. A good accounting system uses individual transactions from banks and can be reconciled with a bank statement to account for all transactions. 

The criminal mind is very crafty and sometimes realizes that journal entries are easy to find and track, so they get creative. Accounts payable (AP) fraud can be the most damaging type of fraud in business. It is also the easiest to perpetrate. Check tampering, billing schemes and fraudulent expense reimbursements are the most common. 

A few things to look for would be unusually large payments to a single vendor, duplicate payments to the same vendor, payments that fall just under amount needing authorization or repeated purchases from a vendor with poor quality goods. You need to know your vendors, check how their name is spelled, check email addresses, check physical addresses. It is easy to have a slight change that redirects money. 

Additionally, you want to make sure that each person that has login permissions has their own login to bank and credit card accounts. Do not give your personal logins to anyone, even trusted employees, accountants, or family members. Once you do that, you have just given away your first layer of protection.

Oversight and an educated owner are the best practices to help protect your company’s assets.

Sharon Dubois is NACB certified bookkeeper and co-owner of United States Bookkeeping Co. As a QuickBooks ProAdvisor, she works with entrepreneurs in a variety of businesses teaching them how to read and understand their company’s financial reports and how they relate to day-to-day operation of their business. In her spare time, Sharon is busy with the Marine Corps League and the American Legion Auxiliary.

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