A former bookkeeper of a Sussex N.B. corner drugstore lands in jail for stealing $250,000 from her employer. Another bookkeeper for a rural group that brought electricity to Alberta farms pleaded guilty to paying herself 20 times her normal wages and pilfering nearly $100,000 from the co-op’s coffers. In Saskatoon, an employee with access to a company’s direct-deposit payroll system earns 18 months in jail for overpaying herself 48 times within a span of four years, bilking her company of no less than $334,000.
It doesn’t matter how big or small your business is, lax security and lazy accounting practices are an invitation for insider embezzlement, according to Ester Friedberger Karp, a Toronto-based professional small and medium-sized business adviser. Karp is president and owner of CompuBooks, a business consulting, computer training and business process re-engineering firm.
“There are countless small businesses across the country that have gone under or at least have been driven to the brink because they have blindly entrusted the all aspects of their cash flow and accounting to a single person,” Karp told ITBusiness.ca.
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Although business can also fall prey to outside fraudsters, Karp said, it is not uncommon that perpetrators turn out to be family members involved in the business or employees that had been given nearly “unchecked” access to the company books and cheques.
Karp said SMB operators, even if they are frequently hamstrung by tight budgets and staff shortages, can avoid being fraud victims by boning up on the basics of bookkeeping, implementing practical security procedures and learning how to use the accounting software. “One of the big mistakes of business owners is to install the accounting software, forget about it and handover the whole responsibility of the company books to another person.”
Many of today’s accounting software products, Karp said, have security features that business owners can easily activate to help in preventing or detecting possible fraud.
Common types of fraud
There are many variations of ways that unscrupulous employees defraud their employers. Here are some of the more common types:
- Fake vendor – Perpetrator creates a fictitious vendor (often with a name that resembles one already doing business with the company), open a bank account under that name and pay bogus bills to that fake account.
- Ghost employees – An employee with access to company payroll establishes an account for a non-existent worker. The employee then proceeds to pay this “ghost employee” a regular salary and perhaps even some bonuses. This could carryon un-detected for years in larger firms.
- Salary padding – A company accountant or bookkeeper can alter payroll so that they receive higher salaries or bonuses. This can remain unnoticed for quite some time as long in outfits where the person cutting the cheque and doing the audits are one.
- Creating a shadow company – An employee can create a bank account with a business name similar to your company’s name, for example if your business is InterLink Service the bogus company can be InterLink Service Inc. The perpetrator just adds Inc. to the “pay to” field of cheques received by your business and deposits the cheque to bogus company’s account.
Bookkeeping security and accounting software
Karp of CompuBooks, said that samples above and many other types of fraud can be avoided by implementing simple and practical security measures.
“I realize that most SMB owners already have a lot on their plate. But they need keep a keen eye on their financials because cash flow makes or breaks a business,” she said.
Karp said SMB owners should:
- Learn the basics – Apply for courses in basic bookkeeping so that you have an idea of what the figures in your ledgers mean.
- Know who you’re hiring – Conduct due diligence on checking the background of people you hire especially those who will be handling money, cheques, accounts payable and accounts receivable.
- Don’t delegate everything – Don’t just purchase an accounting software and then hand over everything to your bookkeeper, but institute checks and balances. For instance, the person writing out the cheques shouldn’t be the same person conducting the auditing or reconciliation. Karp said a large number of frauds go undetected because only one person handles disbursement and auditing.
- Make sure cheques are locked up – Don’t leave cheques lying around. If possible have them locked up in a drawer near you and make sure you are aware what’s being paid.
- Audit regularly – If your business does an audit only once a year, then you may be in trouble. Accounting systems and software should be updated with current data regularly and in shorter intervals (daily if possible) to ensure that data is fresh. This way discrepancies and possible fraud could be detected earlier.
- Turn on security features – These days even the most rudimentary accounting software has some form of security features. According to Karp these features should at least include a way of telling: what changes were made, who made the changes and when. Other systems can flag discrepancies. “These way you have an electronic audit trail of what was going and who may be responsible for any questionable entries.”
There’s one dead giveaway for fraud, Karp said, that may not need any technology to detect. When a person handling the business’s finances or accounts repeatedly refuses to take any vacation, it could be a sign that something is afoot.
“Of course it’s not always the case. But if could be that that person is trying to prevent others from spotting accounting discrepancies by making sure he or she only sees the books up close,” Karp said.
Nestor Arellano is a Senior Writer at ITBusiness.ca. Follow him on Twitter, read his blog, and join the IT Business Facebook Page.