Skip to content

How to Detect Bookkeeping Fraud in Your Company

  • Bookkeeping News
  • Industry News

No business owner sets out to commit bookkeeping fraud (well, the majority don’t); however, it does happen. Business tax and financial systems can be complex and confusing to understand, and inexperienced small business owners and entrepreneurs can sometimes make mistakes. On top of this, stress and exhaustion can lead to mishaps. Sometimes, completely unintentionally, bookkeeping fraud is committed.

On the other hand, small businesses are also often the target of fraudulent behaviour as they lack the manpower to detect the crimes. If you or a trusted bookkeeper is not solely responsible for the financial duties of your business, you could be opening yourself up to fraud. Obviously, we’re not suggesting that you should become suspicious of your staff, but sometimes you just don’t know.

There are many different types of fraud that can occur within businesses. The ATO often audits businesses to ensure they are following the correct processes and keeping appropriate records. So, it’s important to understand the types of fraud to know what to look out for in your business, should you experience this unfortunate situation. This article outlines some of the most common examples of bookkeeping and accounting fraud within businesses and how to detect and prevent them. So, have a read through to protect your small business from financial fraud.

Common Types of Fraud

Embezzlement/ Larceny

This is a category of fraud that is typically committed by the person who controls the funds of the business. The individual(s) misappropriate the business’ assets in a way that is not intended for the benefit of the business, commonly for personal use. For example, when someone with access to the company account withdraws money to pay for personal expenses or diverts money to a personal account under false pretence, this is embezzlement. Sometimes embezzlers create bills or receipts for business activities that never occurred to disguise the transfer of funds as legitimate. Always double-check transactions to ensure their legitimacy.

Accounts Payable Fraud

Accounts payable fraud is often committed in the form of duplicate or false invoices paid to the account of the perpetrator. This is by far the easiest fraud to perpetrate as it goes through a legitimate system, the accounts payable function, which is legitimately how vendors are paid. Therefore, it is also the most damaging type of fraud, as it can go undetected for so long. Things to look out for include unusual vendors, increased payments to vendors, payments that consistently fall under the cap for requiring authorisation, and any odd feedback from customers or vendors.

Payroll Fraud

Similarly, payroll fraud involves money being diverted to the fraudster by the business’ payroll system. This can include a fake or existing employee receiving payment, advances that don’t get reimbursed, and falsified timesheets. Like accounts payable fraud, this crime is extremely common and damaging. 

Shell Company Fraud Schemes

This involves the diversion of company funds and assets to a shell company, meaning a company that only exists on paper, to embezzle money, launder money, or evade taxes. Many of these shell companies are registered in countries where the tax system works in favour of large companies (they are given a massive tax break and therefore don’t have to pay as much into their own government’s system). This type of fraud can be perpetrated by anyone within a business and may appear as a vendor transaction or transfer. Again, remember to check your statements. 

Tax Evasion

This one can easily happen if you’re not well informed of tax processes for businesses in Australia. Fabricating the amount of assessable income you make or tax-deductible items to reduce the amount of tax paid is illegal and can result in harsh penalties should you be audited by the ATO. 

How to Hire the Right Bookkeeper

Getting a trusted and highly qualified bookkeeper is a great way to make sure you’re doing everything by the book. However, you have to be careful. There are some dodgy people out there – who remembers the Silversea Cruises scandal of 2018?

For the most part, however, bookkeepers are an asset to small businesses as they can help run the financial side of a business – your accounts payable, payroll, and daily transactions – and they help you prepare your reporting obligations (BAS) and tax calculations. That being said, as they are in full control of your business’ finances, you need to choose someone you can really trust.

When searching for a bookkeeper or accountant, always go with a reliable organisation that matches you with accredited bookkeepers. This way you can ensure they have gone through a comprehensive selection process and are highly trained. There are also some other things you should also consider to help narrow down your search. For example, what kind of business do you run?

You should seek a bookkeeper that specialises in your field or at least has some industry knowledge or background. This will ensure they can help you navigate the uniqueness of your business and optimise your financial status. If you believe you’ve found the right person, ask yourself – are they transparent? You should make sure you stay in the loop when it comes to your accounts and the transactions being made to and from your business. Your bookkeeper should be open to discussing all areas of your business with you. After all, it is your company!

On your part, it’s also important to have some knowledge in the field. You should educate yourself on the basics of accounting and bookkeeping. Not only are these valuable life skills, especially for running a business, but they will also give you the ability to identify when something that doesn’t quite add up. Did you know that you can learn about business finance for free? Check out this search for free workshops that the ATO hosts for small business owners (keep in mind that these may be impacted by COVID-19).

Another tip that can help you with your bookkeeping in general – should you wish to not recruit a bookkeeper – is investing in bookkeeping software. This can ensure that all your transactions and information are in the one place and accessible for any time. This will also limit any hidden transactions occurring that you may not be aware of. It will also ensure that your business data is secure and safe from external sources of fraud and corruption.

Also, should something sketchy happen (in an unfortunate turn of events), a forensic accountant will easily be able to search through your data to find the source of your discrepancies. If you’re finding bookkeeping and accounting software too hard to get your head around, Shoebox Books bookkeepers can help you learn the ropes. This is a great way to learn the software and empower yourself to understand the financial side of your business. 

How to Prevent Fraud

If you already have a bookkeeper working within your business, it’s still worth hiring an external bookkeeper every now and then to conduct an audit of your business’ financial statements. If you feel competent enough, you can also conduct these audits yourself (as mentioned above, getting involved in your finances and understanding basic bookkeeping is an important aspect of being a business owner). Another step is to make your staff more accountable when completing financial processes.

Encourage reports or summaries of the month’s transactions to ensure you have an overview of the situation. Ensure all supervisors are aware of the hours their team members worked. Have them approve timesheets and submit them to avoid payroll fraud. Overall, restrict employee access to modifying timing details in timesheets, and always make sure terminated employees are taken off the payroll. Without getting too nosey or invading privacy, try to also be aware of what’s going on your employee’s lives (to an extent). Lavish and extreme lifestyles could draw your attention to something that isn’t quite right.

Again, observe from a distance – we are not condoning spying. Lastly, one super-easy way to grow your understanding of business finance is by keeping up with Shoebox Books’ blog. We regularly post articles that give tips to business owners on how to grow their business, and we share relevant news and updates regarding the financial and business sector. Check out more articles after you finish reading this one!

Shoebox Books is Here to Help

If you’re ever in a pickle with your new business and need a little extra help getting your financial processes streamlined, call in a Shoebox Books bookkeeper to assist you. Our bookkeepers are all over Australia and are waiting to help support your business so that you can grow and prosper. Find your nearest bookkeeper today.