How to Write a Successful Business Plan

Fraud is an ugly reality of the modern world. Nobody wants to contemplate the possibility that a trusted close associate, a colleague — perhaps even a friend or relative — is betraying our trust.

Nonetheless, it has happened. Hopefully, it will never happen to you, but it never hurts to stay vigilant. 

Signs and Symptoms

An employee or vendor may be driven to pilfer by any number of life circumstances.

He or she may be sick, or suffer financial distress. Their spouse might be unemployed, or they might have trouble paying for a relative’s medical care. They could have rung up massive credit card debt. He or she may have a gambling habit or a drug habit.

There are many life circumstances that could account for such behavior, some of them quite humanly understandable.

If you happen to have such background knowledge regarding your bookkeeper, or even if you don’t, keep an eye out. If their behavior suddenly changes, they may be entering a period of life crisis.

Watch for signs that he or she is unhappy or distracted.

Are they working long hours or coming in at unusual times? Are they unusually controlling of the books they manage? It’s probably nothing, but it never hurts to stay on the qui vive.

Another obvious sign is books that repeatedly fail to add up. A few mistakes here and there are only human, but if books never seem to quite balance on a particular bookkeeper’s watch, incompetence is the least terrible explanation.

No need to jump to conclusions, of course. There may be an error in your processes or a problem with a vendor or a computer issue. Look into all the possibilities before you start asking hard questions.

Another sign that something may be wrong is a sudden drop in revenue.

Of course, this could just be the product of a recession, a seasonal change, or the rapid encroachment of a competitor. It could be, again, some problem with your company’s processes, a software glitch, or maybe you yourself made a mistake.

We all make mistakes! But run through the possibilities and eliminate what is impossible to reveal what is true. 

Steps to Mitigate Risk

Setting up a reliable system of internal controls is the best way to mitigate the risk of fraud.

This fundamentally means separating duties so that, for example, the person who records bills is not the same person in charge of paying them.

The employee who collects revenue from the clients should not be the one who deposits them in the bank. And the person reconciling bank statements should certainly never be the one who is writing the checks!

A robust system of checks and balances can greatly reduce the risk of fraud. Of course, it is possible that more than one employee will collude. But the risk here is much lower.

It’s far less likely that two employees are both having financial and personal problems that might make them want to risk the consequences of theft, far less likely that both are ethically impaired. And if, by some chance, they did collude, the possibility that they would get caught goes up, since they might turn on each other and since any communication they have on the subject might be intercepted.

Good retail accounting software also greatly mitigates the possibility of fraud. They’re usually inexpensive and reliable.

Most of them have compliance and security functions built in. They just need to be properly set up and maintained. Limit authorized access to only those who need it. Especially limit administrator rights to high-ranking personnel who really need them. And have a password policy to ensure that credentials are secure and confidential.

You can use software to accord employees access rights commensurate with their respective roles.

You can restrict their access to records outside of their particular job function, and make certain kinds of transactions subject to administrator approval. (It would help things greatly if you yourself are the administrator!)

Outsourcing your bookkeeping and accounting functions to a reputable provider is yet another way to reduce the risk of fraud.

Large bookkeeping companies have reputations to maintain, compliance and legal obligations to abide by, and a customer base to satisfy. They typically have internal controls and a large number of employees with distinct job roles. Outsourcing is also a good way to cut costs.