Know Thy Bookkeeper: 14 Red Flags for Preventing Fraud

I've often heard this comment by franchisees: "I keep my own books to save money, but I really hate the process!" Just as often, I've made the following response: "Business owners/managers should do what they do best; focus on making it and selling it."

If you really do hate bookkeeping (and I know I do), there's a predictable outcome: at 10 p.m. on the last day of the month, you'll still have 3 or 4 items you're not sure where to put--so you'll just "shove them in somewhere."

After a few months, your books and records will be riddled with inaccuracies. Since all of my previous articles have focused on using the powerful of Profit Mastery to make better, more strategic financial decisions, the lack of accurate financial information will render these financial tools useless because the data you're using is not accurate. A classic case of GIGO--garbage in, garbage out.

On the other hand, when you bring in an outside bookkeeper to keep track of the financials, you then have another person whose hands are on the flow of funds through your business. And, although the likelihood seems remote, there is a chance they could decide to siphon off some of the funds for themselves. Yes, fraud.

Remote possibility, you say? I agree. However, perhaps not for the reasons you think. I believe the possibilities are remote for one simple reason: most people are honest.

However, over the years the thousands of accountants who have attended my Profit Mastery sessions have consistently related the same message that because of inadequate controls, supervision, and separation of duties, most businesses are exceedingly vulnerable to fraud; they just haven't run into the "dishonest minority." Yet...

14 red flags to watch for

So, lest you get too lax, I offer the following checklist as a "bookkeeping fraud net."

  • Has your bookkeeper asked for signature authority on your checks?
  • Does your bookkeeper frequently make telephone transfers from your bank accounts or credit lines?
  • Does your bookkeeper's lifestyle seem inconsistent with their earnings?
  • Does your bookkeeper frequently take records home to work on, or work in the office when no one is around? (Fraudulent activities are more easily accomplished when no one else is around.)
  • Does your bookkeeper refuse to go on vacation?
  • Does your bookkeeper seem to resent or get defensive when you or your CPA ask questions?
  • Does your bookkeeper have access to your credit card information and receive mail-order packages at work?
  • Are your records a mess?
  • Do you receive frequent tax delinquency notices that the bookkeeper explains away as government error?
  • Does your accountant insist on handling activities for which other departments are normally responsible? These might include picking up the daily mail (for fear something could arrive that would tip off management), acting as the sole go-between with the company's financial contacts (banks, auditors, creditors, etc.), and working with police when items or money are missing?
  • Does your bookkeeper continually misfile important items such as payroll receipts, deposit records, supplier correspondence, and estimates?
  • Do your deposits frequently seem too small? Owners should always carefully monitor income and deposits, comparing sales receipts against actual amounts put into the bank.
  • Does your bookkeeper show signs of a drinking, drug, or gambling problem, or family financial problems?
  • Has your bookkeeper suggested replacing or getting rid of the outside accounting firm, saying they can handle the duties of the independent accountant and "save the company the added expense?"

If you answered yes to any of these questions, don't panic. Chances are there is a perfectly reasonable and acceptable explanation. But don't ignore the symptom either. Talk with your CPA and carefully evaluate the situation. You may only need to put some additional controls in place.

Fraud or embezzlement can occur at any point in your operation. So think about everyone in your organization who "touches" the flow of funds, services, or products through your company. And apply an "edited version" of the above questions to the situation.

Finally, remember that it's the victim who provides the opportunity, and the thief who supplies the "need." And there are many events that create need, from alcohol, gambling, and drugs to just plain greed. In the end, the odds of experiencing fraud or embezzlement are exceedingly low... unless it happens to you. As the Boy Scout motto says: Be Prepared.

Finding a CPA

  • - a listing of state CPA societies, most of which will have a section called "Find a CPA"; searchable by type of service needed as well as by industry
  • - for locating accountants by area; very basic and more comparable to a telephone directory listing
  • - this directory also provides nationwide search capabilities
  • - QuickBooks has a great website to search for a local QuickBooks expert

Steve LeFever is the founder and chairman of Profit Mastery, a Seattle-based eLearning company that has trained more than half a million people worldwide on how to measure and manage financial information to consistently increase business profits. Their educational programs are available online as an on-demand video program 24/7/365. Learn more at or contact him at 800-488-3520 x14 or

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