Spooky Happenings in Accounting
Running a small business is no small feat. It is a world of tight budgets, countless responsibilities, and the constant drive for growth. Yet, even in the bustling world of small business, financial fraud can creep in unnoticed, potentially causing significant losses. In order to help small business owners safeguard their finances and protect themselves from the risks of financial fraud, we want to provide a few valuable insights and useful tips. We will explore practical steps and preventive measures to ensure the financial integrity of your business.
Understanding the Need
As a small business owner, you might wonder if the world of forensic accounting is relevant to you. You may not require the services of forensic accountants for large-scale investigations, but the principles they employ are just as critical for small businesses. Financial fraud can take many forms, often perpetrated by trusted employees or long-time office managers. We recognize that our audience consists of small business owners, and our goal is to equip you with the knowledge and tools to mitigate the risk of internal fraud.
Examples of Fraud:
Payroll Fraud: In a concerning statistic, payroll fraud affects approximately 27 percent of all businesses, with smaller ones (fewer than 100 employees) falling prey twice as frequently as larger enterprises. To safeguard against this threat, owners should first understand their payroll system and promote accountability among their bookkeepers in monthly reports. As businesses grow and payroll complexities increase, especially with overtime, maintaining consistent vigilance becomes paramount to protect both finances and business integrity.
Online Banking: The heightened popularity of online banking brings with it an increased risk of funds ending up in erroneous accounts. In response, business owners should schedule regular meetings with their accounts team to closely monitor all money transfers. With the ever-increasing sophistication of cybercrime, it is imperative that small business owners stay informed about emerging threats, allowing them to coordinate their responses effectively with their relevant financial institution.
Invoice Scams and False Invoicing: This scheme frequently involves impostors who masquerade as reputable suppliers, suggesting modifications to existing payment arrangements. The deception may go unnoticed until it is too late, with businesses only realizing when suppliers complain about missing payments. Regularly checking your accounts is crucial to safeguard against business owners falling prey to these fraudulent activities. Additionally, false invoicing poses a growing threat, making it imperative for business owners to maintain basic oversight of every vendor. This type of fraud often occurs when employees generate fictitious suppliers or redirect payments meant for legitimate suppliers into alternative accounts.
Tips to Mitigate Risk
Here are some practical tips to help you safeguard your small business:
Regularly Review your Data: For small teams with shared access to financial data, it is crucial to conduct monthly independent reviews of bank statements, bank reconciliations, and vendor payments. This practice helps identify any anomalies or discrepancies.
Background Checks: Implement thorough background checks for all employees, particularly those handling finances or sensitive information.
Regular Reconciliation: Consistently reconcile financial records, bank statements, and transactions to identify discrepancies promptly. Subscription based accounting services can fill this need at a lower cost than a full-time controller which can be a great option for businesses.
Whistleblower Policy: Establish a confidential reporting mechanism to encourage employees to report any suspicious activity without fear of retaliation.
Multi-person Sign Off: Like controlling information access, setting up a multi-person approval process for financial tasks such as expense claims, overtime, and payroll functions adds an additional layer of security. This can effectively detect any unusual activities, deter potential wrongdoing, or even catch a simple, honest mistake made by an employee.
Employee Education: Educate your team about the risks of financial fraud and the importance of reporting any concerns.
Use Accounting Software: Invest in reliable accounting software that offers security features and audit trails to track financial activities.
External Audits: Consider periodic external audits to ensure the integrity of your financial statements.
Use a subscription accounting service: By utilizing an accounting service like Executive Allies, you will mitigate the majority of the risks above as we provide a level of oversight and expertise that is usually lacking within a small business. Business owners typically do not have extra time to be able to review all transactions or ensure reconciliations are done properly or timely. However, by using a high-touch service, like Executive Allies, business owners will have peace of mind that all their accounting records are accurate and kept up to date.
Conclusion
In conclusion, by bringing awareness of the financial fraud that can occur to small business owners, steps can be taken to mitigate or prevent this scary fraud from occurring in their companies. We understand that owners need practical solutions and valuable information to safeguard their businesses. By implementing the tips and strategies outlined here, you can reduce the risk of financial fraud and protect your hard-earned assets. Remember, proactive prevention is your first line of defense against the threats that may haunt your small business.