Fraud Prevention 101

QuickRead has released a list of six simple steps you can take to prevent or catch financial fraud:

Know your employee. In this particular case, the business owner recounted that he knew the prior employer of the bookkeeper really well. He was aware that the bookkeeper had left the prior employer on less-than-positive terms but figured it was none of his business and hired the bookkeeper because of the bookkeeper’s knowledge of the industry. A phone call to the prior employer/friend after the embezzlement was discovered revealed that the bookkeeper was probably stealing from the current employer to pay off a judgment obtained by the prior employer to recover embezzled funds.

Embezzlers tend to be repeat offenders. This is an obvious follow-up to the prior point. A simple background check is not expensive, easy to do, and in this case would have prevented a really bad hiring decision. It would have confirmed the ill-at-ease feeling of the employer at the time of hiring.

Open your own mail. Let the bookkeeper do the bookkeeping. You cannot abdicate other important (and seemingly unimportant) functions because the clerk is always around and does their job well. Vendor communications, bank statements, and bills from vendors and suppliers are important sources of information.

Separate functions and duties. Many small business owners are so busy that they tend to overlook common sense when assigning work. In this case, a bookkeeper was eventually given the responsibility for answering the phones, opening all the mail, writing checks, making deposits, preparing invoices, reconciling the bank statements, and preparing the financial reporting provided to the business owner and his outside tax preparer. As noted above, simply opening the mail would have prevented some of the problems or would have brought the fraud to light a lot earlier.

Don’t accept bad answers to good questions. When the forensic accountant arrived on-scene, the business owner requested a report showing payments to all vendors. In the past, the business owner’s similar requests to the bookkeeper were met with a long list of reasons that it was difficult to put such a report together, would take a long time, and would not be precisely correct. The accountant produced the report in about 90 seconds. The business owner was shocked, and the point was made. His bookkeeper for a long time had prevented him from seeing the very report that exposed the whole scheme. He had been given every reason in the book why the report couldn’t be produced.

Force vacations. Nobody else had access to the bookkeeper’s work for over two years. Another set of eyes on the accounting records would have exposed everything.

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Davis and Hodgdon Associates CPAs has been assiting businesses with fraud prevention and detection services in the Burlington Vermont Metro area for more than 20 years. Bret Hodgdon, CPA, CFP, CFE, CGMA is one of only a few Certified Fraud Examiners also holding the CPA designation in the state of Vermont. For more information visit:  If you have any questions or concerns please feel free to call 802.878.1963 or email [email protected].

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