Once upon a time, you decided your business was at the point where you could no longer complete the bookkeeping in the evenings and on weekends. So, you decided it was time to hire an in-house bookkeeper. What a relief!
You posted a job on Indeed or some other job search platform. You interviewed many candidates and ultimately landed on your ‘dream bookkeeper.’ They can do full-cycle bookkeeping, make payments for you, invoice your customers, complete collections, produce financial statements, among other tasks that you’ve been doing before hiring them. What a relief!
The first day, first month, first quarter, first year, are all going swimmingly. Your new bookkeeper is keeping the books updated. You know where your business stands each month to help you make better business decisions on a regular basis. Your new bookkeeper even offered to create internal policies that state they’ll be the final approval for all outgoing payments and purchases. From your point of view that makes sense because you want accounting/finance’s input on these types of transactions. What a relief!
Eventually, your financials start to look… off. Your profitability is starting to go down but you’re not sure why that is the case. Your expenses seem like they’re pretty standard when you look at them month-over-month. There are a few spikes here and there, which you ask your bookkeeper about and they have the answer ready and waiting for you. You accept the answer and move on thinking that you can turn the boat around and make your business more profitable as long as your bookkeeper keeps providing you the right information at the right time. What a relief!
Your revenue continues to go up and profitability has been stagnant or down a bit. What the heck is going on? At this point, you’re not sure what to do so you seek outside council.
You: “Thanks for meeting with me, Blueprint Accounting”
Blueprint: “Happy to be here. How can we help?”
You: “I want you to review my books to see if there are any financial discrepancies. My revenue is up but my profitability isn’t up. It’s stagnant and in most cases it’s down”
Blueprint: “We’ll take a look into this for you and let you know what we find”
Some time later…
Blueprint: “After review of your books, we suspect that your bookkeeper has been stealing money from you. Do you approve any purchases and payments?”
You: “What?!? My bookkeeper would never steal from me. I trust him/her implicitly. Are you sure? I’ve given him/her authority to approve all payments on my behalf”
Blueprint: “We’ve found some transactions that don’t align with the structure of your business and your business model. These total approximately $250,000 over the last 3 years. Some transactions are payments directly to your bookkeeper as reimbursable expenses while others are direct purchases on your company credit card. As we said, they look very strange given the nature of your business”
You: “$250,000?!!? We need to get to the bottom of this”
You may have seen scenarios like this play out on the news and in newspapers. It happens more frequently than you’d imagine. In most cases, it’s related to having poor internal controls and oversight on financial data.
This is understandable: you are putting your trust in an internal resource to manage the entire bookkeeping function. You don’t want to dip your toes back into this area of your business because you want to focus on what you do best and leave the accounting to the bookkeeper.
The problem with this is perceived (or full-on lack of) internal controls. These are so vitally important to your business so that you don’t have to go through the above scenario ever. While it may be burdensome to have to approve payments as they come due, it’s a very simple internal control to implement and manage.
Here are our Top 4 Internal Controls to ensure your business doesn’t run into internal fraud:
Internal control tip #1: Payment approvers need to be separate from payment submitters
You should NEVER have the same person entering data being the approver on that data. That is an extremely poor internal control. This is the biggest culprit for fraud. If your bookkeeper is submitting and approving payments right now, change this immediately. Apps such as Plooto and Veem can help you with this. They allow you to set up an internal control so that one person can submit payments, and another approves them. This ensures that you’ve created an internal control to reduce any effects of fraud for paying suppliers and vendors.
Internal control tip #2: Implement a pre-purchase approval process
Depending on the size of your purchases, you may not care to approve each one individually BEFORE it’s been purchased. But, implementing a pre-purchase approval process will ensure that what is approved can be matched up to what is paid once purchases are made. You can do this very easily by implementing a purchase order internal control. For any purchase that needs to be made, a purchase order must be produced and submitted to the supplier or vendor. While this does add an extra step to your purchasing process, you can reduce fraud from occurring because you will now require PO’s to be created for all purchases. As with tip #1, you’ll want to have the submitter and approver be two separate people. Pairing this with tip #1 ensures that you have approval up-front and, on the backend when making payments.
Internal control tip #3: Use third-party apps as an access control
It might be easier to give other employees access to your books to complete tasks and update data, but it also gives them access to your most important data: your financials. Knowing all of your financial data can provide more opportunities for fraud. Most. Accounting software platforms have some form of access control. Access such as:
- Only seeing accounts payable data
- Only seeing accounts receivable data
- View-only access
- Reports-only access
Even with these access rights being granted to internal staff, fraud can still occur.
One way around this is to have a third-party app where your team can access and complete tasks through the app. This app can be integrated with the accounting platform where another employee has access, such as your bookkeeper, to maintain financial records. A great example is in the construction industry. There are apps such as Buildertrend and Knowify where all service and admin employees can complete construction-based tasks directly inside these apps. The data can be synced back to your accounting platform where it can be used to produce financial reports, make payments to suppliers and vendors, and collect on your customer invoices. This is a nice segregation of duties because the operations staff is in their element using the construction-based app, whereas the accounting staff uses the accounting platform.
Internal control tip #4: Outsource part of your accounting function
You had to know this would be a tip! It’s quite straightforward. Whether you outsource all or parts of your business, this is an excellent way to implement internal control in your business.
By outsourcing parts of your business, you don’t have one single person completing all the accounting tasks. Even if you outsource your entire accounting function, most accounting firms have multiple levels of approval and review on your transactional data to ensure no fraud occurs. Paired with the above tips, you can rest easy knowing that your business has a reduced risk of fraud occurring.
Blueprint Accounting is a Canada-wide cloud-accounting firm that can work with you for outsourcing needs. Check out our services online and reach out for a free consultation so we can help you figure out how to produce better internal controls.