Our blogs regularly detail how professional bookkeeping can help businesses survive and thrive beyond simply recording transactions and preparing tax filings, like driving profitability with financial reporting, forecasting cash flow, and optimizing your accounts receivable.
But there’s another often overlooked benefit: rigorous, detailed bookkeeping inherently helps prevent opportunities for fraudulent activity and enables prompt detection of suspicious activity. Fraud is a constant concern for businesses, whether internal or external. It can have various detrimental impacts, including undermining a business’s financial position, exposing it to lawsuits, incurring penalties from tax and regulatory authorities, and damaging its reputation.
Let’s examine how fraud prevention and detection is automatically “built-in” to a properly designed and implemented bookkeeping process, making it your first and most reliable line of defense against fraud.
TIMELY RECORDING OF ALL TRANSACTIONS
A rigorous bookkeeping process enforces the timely recording of all transactions. This immediately creates a first line of defense against fraud and builds a solid foundation for other aspects of fraud prevention. For example,
- Timely recording of sales transactions reduces the likelihood of unrecorded sales or manipulation of revenue figures. This helps detect potential skimming or fraudulent sales schemes.
- Recording purchase invoices as soon as they are received and verified helps detect potential fraud related to duplicate payments, fictitious vendors, or inflated expenses.
- Prompt depositing and recording cash receipts minimizes the risk of theft or misappropriation. This practice ensures that all cash transactions are accurately accounted for, making it more difficult for employees to conceal cash theft.
- Regular monitoring and recording of bank transactions allow for the early detection of unauthorized transactions, such as fraudulent electronic transfers or forged checks, which could indicate embezzlement or other fraudulent activities.
- Timely review and recording of employee expense reports make it harder for employees to submit fraudulent or inflated expenses for reimbursement, as discrepancies can be spotted more quickly.
REGULAR, SCHEDULED RECONCILIATIONS
To ensure accuracy, a quality bookkeeping system enforces regular reconciliation – comparing and matching financial records from different sources, such as bank statements and company books. There are many types of reconciliation, each of which inherently contributes to fraud prevention. To list just a few:
- Accounts receivable reconciliation. A rigorous bookkeeping process regularly reconciles accounts receivable balances with customer statements and payments. This can help detect fraudulent activities, such as lapping, a scheme where an employee steals a payment from one customer and covers it up by applying a payment from another customer to the first customer’s account.
- Accounts payable reconciliation. A properly designed bookkeeping system builds in scheduled reconciliations of internal accounts payable records with vendor invoices and statements. It can help uncover duplicate payments, fictitious vendors, or unauthorized changes to payment terms. Regular reconciliation can also detect cases where employees create false invoices to embezzle funds.
- Credit card reconciliation. A quality bookkeeping process will regularly reconcile company credit card statements with internal expense records. This can help identify unauthorized or fraudulent charges and instances where employees submit personal expenses for reimbursement or inflate business expenses.
CREATION AND MAINTENANCE OF AUDIT TRAILS
An audit trail is a chronological set of records that provides evidence of financial transactions and activities, allowing auditors and management to trace transactions from their origin to their final destination in the financial statements. Quality bookkeeping creates and maintains a variety of audit trails that help prevent and detect fraud, including:
- Transaction documentation. Quality bookkeeping ensures that appropriate source documents, such as invoices, receipts, purchase orders, or payment vouchers, support all transactions. These documents serve as evidence for the transactions and can help prevent or detect fraudulent activities such as fictitious sales or revenue, duplicate payments, false expense claims, and vendor fraud.
- Sequential numbering: Using sequential numbering for documents such as invoices, checks, and purchase orders helps to maintain a clear audit trail. It allows for easy identification of missing or duplicate documents, which could indicate fraudulent activities such as skimming, lapping, false expenses, and manipulation of records.
- Electronic timestamps: Modern bookkeeping software automatically generates electronic timestamps to record the date and time of each transaction. These timestamps create a chronological record of all transactions, making identifying unauthorized or out-of-sequence entries easier.
- Journal entries and ledgers. Rigorous bookkeeping ensures that all transactions are accurately recorded in the appropriate journals (e.g., sales, purchases, cash receipts, and disbursements) and posted to the general ledger. This comprehensive record-keeping allows auditors to trace individual transactions and detect unusual entries or discrepancies.
- Approval and authorization records. An effective bookkeeping process includes maintaining records documenting the approval and authorization of transactions, such as purchase orders, expense reports, or payroll adjustments. These records help ensure that all transactions are appropriately authorized and can help identify fraudulent transactions that bypass internal controls.
Investing in a quality bookkeeping process provides much more than just a means to record transactions and prepare for tax filings. It also serves as a robust and proactive shield against fraud, safeguarding your business from potential financial and reputational damage. By implementing timely recording of transactions, regular reconciliations, and creating and maintaining audit trails, you can expect a well-designed bookkeeping process to act as your first and best line of defense against fraudulent schemes.