Trust is not a Control: Accounting Fraud and the Small Business

Small businesses are more vulnerable to accounting fraud or employee theft. According to a study, more than 40% of accounting fraud occurs in small to medium-sized businesses due to a lack of internal control caused by the company’s weak controls, a permissive culture, and human error. You may be surprised to know that the loss of capital due to accounting fraud, on average, amounts to around $200,000 per incident for a small business. Another study found that trusted employees steal more from the company than those who are new to the business. Most small businesses have trust in staff who handle bookkeeping or accounting activities and believe that fraud can’t happen to them. Still, the reality is they have every reason to worry because fraud is almost inevitable.

Often the blind trust owners put in staff can lead to being open to fraud. This can be more commonly seen in accounting staff or those who have access to financial data.  Trust is not a control, so an owner must review financial records and keep a close eye on the company’s financial status to maintain in-house control. Check out America's Best Bookkeepers

What compels entrusted partners to engage in fraudulent activities?

Fraud can be explained as taking away something from the business without asking the owners. This includes cash, merchandise, and also stealing sensitive information or data from the company. What compels entrusted partners to steal from you is a question that should be addressed before any discrepancy, ambiguousness, or otherwise complicated situations arise. Accounting fraud is preventable. How? By establishing policy and code of conduct for maintaining proper in-house control. According to industry veterans, separation of duties and adequate internal control will eliminate the chances of fraud in your business.

Big Problems often start small! Check out America's Best Bookkeepers

Three factors encourage your accountant to steal from you that includes motivation, opportunity, and rationalization. As per 10-10-80 rule, 10% of people will never steal from you, 10% will always steal from you whenever they get an opportunity, and 80% of people make an analysis of the opportunity at hand first and then decide whether to steal or not. Well, this is the point where you can prevent your employees from stealing from you. Moreover, small businesses lack money and resources that will help them to buy and incorporate advanced bookkeeping and accounting tools and software in a business. By incorporating an accounting system, you can track and monitor your financial books and records that will help prevent accounting fraud.

Creating the Right Corporate Culture

Accountants are generally aware of business processes and are used to the business’s accounting system, which could encourage them to steal from you if they are corrupt. Creating a permissive culture or environment is unhealthy for the business and a threat to the company’s long-term growth and success. By creating a permissive culture, you can expect to witness your business marching towards its gradual failure. When your accountants know they can get away with something without detection, it opens up the possibility that entrusted accountants will engage themselves in fraudulent activities. This indicates that permissiveness creates opportunity, which can be bad for your business. Check out America's Best Bookkeepers

What to Do to Prevent an Accounting Fraud?

To prevent accounting fraud, you must never trust your entrusted partners blindly no matter what. Also, what you can do is create a zero-tolerance policy to any form of fraud or theft, if you haven’t yet introduced in your company’s manual.

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