Business Fraud: Accounting Horror Stories and Prevention Tactics

You won’t catch fraud in time to save your cash if you don’t know where to look in the finances. The unfortunate reality is that fraud and embezzlement can happen in any business, and small businesses are no exception.

We’re here to expose all the dark places fraud can happen in your business and how to catch them before they kill your cash flow.

Remember, you cannot 100% delegate your finances and trust that they’re being handled correctly. Remember, trust but VERIFY. If you’re reviewing financial statements regularly, fraud can be detected in the first instances and stopped.

The Nightmare of Complete Financial Delegation, Real-World Examples

One of the biggest mistakes business owners make is completely delegating their financial management to a bookkeeper or accountant without ever understanding how to analyze the financial reports they produce. While it’s tempting to offload financial responsibilities, doing this without proper oversight can lead to severe consequences, like these stories.

When you don't understand what to look for, and where fraud hides, you’re blind and vulnerable.

The Importance of Understanding Financial Controls

Understanding financial controls is crucial to prevent fraud. Financial controls are the policies and procedures put in place to ensure the accuracy and integrity of your financial transactions. These controls include separation of duties, regular audits, and the monthly review of financial statements. When these controls are not in place, it opens the door to fraud. The perfect example of a control is - the same person who writes the check should not be the same person who signs the check. Controls take away power from any one person and ensure there are multiple eyes on any one risk area.

Horror Story 1: The Case of Law Firm Embezzlement

A recent case caught my attention because it is the perfect storm to remind us of the importance of financial vigilance in our businesses. A woman was sentenced to four and a half years in prison for embezzling funds from a law firm in Virginia.

She controlled the firm’s finances and used her position to funnel money into her personal bank accounts. This accountant was writing and cashing checks because she had the power to write and sign them for herself.

Now, because she was keeping the books, she was able to code the check and make it look as if they were going to legitimate vendors. The firm’s lack of oversight allowed her to continue this scheme for years without being detected. The firm’s owner had no idea that this was happening because they didn’t know how to look at the data.

How You Can Prevent This: Implement a separation of duties, there should always be a control checker for all check writing. Whoever writes the check should not be the person who signs the check. There should be at least two people involved in the process of spending money. Additionally, regular audits of financial records should be conducted to ensure all transactions are legitimate.

You can read more about this case here.

Horror Story 2: Credit Card Fraud

Another common form of fraud involves the misuse of credit cards. Bookkeepers or office managers can make purchases on the business’s credit card and code them as something else.

For example, an office manager might use the business’s Costco executive membership to earn cashback. At the end of the year, Costco issues a cashback check, which the office manager takes, spends a small amount, and pockets the cash difference.

How You Can Prevent This: Regularly review credit card statements and compare them with receipts. Ensure that all purchases are legitimate and match the business’s records. Implement strict controls on who has access to the business’s credit cards and how they can be used.

Payroll Fraud: A Hidden Threat

Payroll fraud is another area where businesses can fall victim. This type of fraud can occur in several ways, including adding fictitious employees to the payroll or manipulating payroll records.

Horror Story 3: The Phantom Payroll

In this case, a bookkeeper added extra employees to the payroll. These “employees” were actually fictitious, and the bookkeeper was funneling their paychecks into his own account. The business’s owner never realized it because they didn’t review their payroll records periodically.

How You Can Prevent This: Regularly review payroll records and compare them to employee rosters. Ensure that all employees listed are legitimate and that their payroll records match their employment contracts. Conduct surprise audits to catch any discrepancies early.

Horror Story 4: The Double Deposit

In another instance, an employee was mobile depositing his paycheck and then physically depositing it at the bank right after. This caused the bank to miss the duplication, and the employer ended up double-paying the employee over months before detecting the issue.

How You Can Prevent This: Carefully review bank statements and payroll reports to ensure there are no duplicate payments. Set up controls with your bank to flag any duplicate deposits for review.

Cash Management: The Silent Killer

Cash transactions are particularly vulnerable to fraud because they can be difficult to trace. Without proper cash controls, it’s easy for employees to siphon off cash without anyone noticing.

Horror Story 5: The Front Desk Cash Grab

In one business, a front desk employee was responsible for handling cash payments from clients. Instead of depositing the cash into the business’s bank account, the employee pocketed it.

The business only looked at their QuickBooks for their financial records and didn’t reconcile it with the physical cash receipts, missing out on $60,000 to $80,000 in profit.

How You Can Prevent This: Implement strict cash controls. All cash payments should be recorded in a receipt book and reconciled daily with the business’s accounting software. Additionally, consider using a cash deposit service to ensure that cash is deposited directly into the bank without employee intervention.

While it may be tempting to delegate your financial responsibilities entirely, doing so without the proper management and controls in place can lead to financial disasters.

By understanding the common ways that fraud can occur and taking steps to prevent it, you can proactively protect your business.

Take Action: Don’t wait until you’re a victim of fraud. Contact us today to learn how we can help you implement the financial controls needed to protect your business from fraud and embezzlement.