I’ve talked a bit about fraud in past posts. Let’s talk about what it is and how we manage to uncover it.
Fraud is an intentionally deceptive action committed to illegally or unethically gain at the expense of another. Common types of fraud include credit card fraud, wire fraud, tax fraud, securities, fraud, bankruptcy fraud, false insurance claims, cooking the books, pump and dump schemes, and identity theft – although there are much more.
It involves false representation of facts, either by omission – withholding important information, not telling the entire truth – or by commission, such as by providing false statements. This takes advantage of the cost of verifying information, which may be sufficient that it’s just simpler and less expensive to trust that the information received is correct, and not verify anything. This is actually what most fraudsters count on – that nothing will be verified.
Fraud is often incentivized by a desire to please investors and/or lenders. Falsifying information in the books for this purpose is often referred to as “cooking the books.” This usually happens due to a conflict of interest. Generally what happens is misstating inventories, failing to disclose contingent claims (lawsuits or questionable insurance claims), and it’s usually just to help the business over a rough patch.
We start becoming concerned that a client is attempting fraud – usually not even realizing that this is the case – when they fail or refuse to disclose information regarding transactions. If they become angry or defensive when we insist on getting the information – we can’t just disregard that, it has to be accounted for somewhere – then we usually find fairly quickly that fraudulent behavior was happening throughout their organization.
When clients bounce frequently from bookkeeper to bookkeeper, we also start looking for fraud. 2 months with one bookkeeping firm and they’re looking for another? That’s usually a huge red flag – and not that the bookkeepers are doing poor work.
We’ve also uncovered fraud being committed by one partner in a firm against the other partner. Local partner was embezzling funds, and distant partner wanted more information – and when local partner refused to turn over accounting records, that led to further investigation leading to uncovering the fraudulent books.
Donna Harris holds a BSci in Accounting and is the owner of Bookkeeping Made Simple. She is currently working on her MBA.
Donna Harris, BSci Accounting, MBA student, founded Bookkeeping Made Simple with the understanding that small businesses is the heart of the American economy. After offering to do books for a friend who said he didn't have enough work to keep someone in the office 20 hours a week, she recognized the need for an efficient, online system. She has 20 years of bookkeeping and accounting experience and is excited to help small business owners achieve their goals. She enjoys spending time with her family and traveling whenever possible. She also loves reading, hiking, camping, cooking, yoga, and fitness. A huge believer in lifelong education, she is currently working on her MBA.