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Bookkeeping & Fraud Prevention | Supporting Strategies


Safeguard Your Business With These Fraud-Prevention Tips


Learn how you can protect your business with these bookkeeping best practices. The key one? Make sure you have more than one person handling your finances.

A range of businesses, from restaurants to tractor repair firms, have lost hundreds of thousands of dollars to embezzlement or fraud. The common thread? A lone person, such as the in-house bookkeeper or office manager, had sole control of a key financial instrument (e.g., checking account or company credit card).

Some of these businesses could have prevented fraud by outsourcing to an outside company. However, as the following story illustrates, you have to make sure the company to which you outsource has more than one person handling the finances and follows bookkeeping best practices, including segregation of duties.

An Outside Threat
A New England woman has pleaded guilty to defrauding more than 20 small businesses out of over $1 million. In this case, the woman was not an employee. She was an independent contractor who ran a payroll and payroll-tax services company.

Still, the underlying problem was the same: The swindler was her company's only employee. When she withdrew money from her clients' accounts — funds earmarked for payroll taxes — and instead deposited the money in her own company's checking account, no one was looking over her shoulder to stop her.

In all, the woman failed to pay over $2 million in payroll taxes for her clients, who were left with unpaid bills, overdue notices from the IRS and massive headaches to sort out. As one of the victims said, "I imagine all of us affected are going to have to fork over time and money." And that's to say nothing of the psychological damage of being victimized by someone they trusted.

A Refresher Course in Fraud Prevention
This case reinforced the need for fraud prevention best practices, including:

  • Month-end close and review: Prospective embezzlers will be far less likely to commit fraud if they know the business owner is checking the books on a regular basis.

  • External audits: In a similar vein, periodic audits can keep fraudsters at bay — particularly if those audits are unannounced.

  • Cash controls: Limit access to company credit card and checking accounts. And if possible, eliminate paper checks altogether in favor of electronic funds transfers (EFT) or an automated clearing house (ACH).

We've saved the most important fraud prevention practice for last and given it a separate category …

Segregation of Duties
To put it simply: Never allow just one person to handle any type of payment instrument without oversight. Do not, for example, allow the same person who reviews invoices to also pay those invoices. You need a second set of eyes on the process.

That's where segregation of duties comes in. With segregation of duties, either an employee or a bookkeeping service provider not with your payroll service provider should be performing the following checks:

  1. Reconciling the general ledger accounts to the payroll reports to verify the accuracy of your general ledger

  2. Comparing the quarterly 941 reports (through which employers report federal withholdings from employee paychecks) to the payroll information to ensure that the reporting by the payroll service provider matches the payroll information

  3. Setting up a review schedule to log in to the tax authorities' websites to confirm that the payroll service provider is remitting payments

If you have just a handful of employees, achieving segregation of duties can be difficult. Fraud is a crime of opportunity. Having an independent third party review your bookkeeper's work — or take over the bookkeeping entirely — eliminates that opportunity.

Still, that payroll-tax fraud case reminds us to add an important caveat: Make sure that any outsourced financial service you use — whether it's bookkeeping, accounting, a payroll service or anything else — is not a one-person operation. Because if that's the case, you might not be eliminating the opportunity for fraud; you might just be passing that opportunity on to someone else.

Call for Backup
You can easily protect your business from potential fraud by establishing bookkeeping best practices. From performing routine bank reconciliations and setting up cash controls to maintaining segregation of duties, you can implement effective fraud-prevention measures at your business — or work with a bookkeeping services company that provides them.

Learn More About Preventing Fraud at Your Business

Supporting Strategies uses a team-based approach that ensures multiple sets of eyes can review every transaction. And our cloud-based bookkeeping solutions provide complete transparency for the business owner — as well as the peace of mind that comes with it. Contact Supporting Strategies today.

Earle Durham


Earle Durham

Earle Durham, Managing Director, Supporting Strategies | Merrimack Valley, MA & Southern Maine, provides outsourced bookkeeping and controller services.

Legal and Tax Disclaimer

This website is created by Supporting Strategies to provide general bookkeeping and accounting information only. Supporting Strategies does not provide tax, legal or accounting advice, and the information contained herein is not intended to do so. As such, the information provided should not be used as a substitute for consultation with professional tax, legal, and accounting advisors, and you should consult with a tax, legal and accounting professional before engaging in any transaction.