Time-strapped business owners often outsource their bookkeeping and accounting, but you still have responsibilities for those numbers. It’s important to make sure your accountant isn’t augmenting or manipulating any financial data – what’s known as cooking the books. Here’s how to detect and prevent creative accounting practices that could ruin your business.
It’s a common enough scenario. You’re at a barbecue and someone – probably your neighbour’s second cousin – is talking about his new business venture. “I made a profit in the first month,” he brags. “My accountant is, should I say, ‘creative’.”
Don’t be that someone. It might be a lighthearted way to describe the intricacies of accounting, but truly creative accounting is at best unethical and at worst fraud – and it could harm your business.
For starters, it distorts the true nature of your business’s financial and operational health, which means you could see warning signs too late to do anything about them. But it could also mean fines or even jail time for you – the business owner – even if you weren’t the perpetrator.
Finding Fraudulent Finances
Business owners who outsource their bookkeeping and accounting are still responsible for the figures, so you need to keep an eye on what’s happening with your balance sheet. Here are some methods you can use to check whether a staff member or your accountant is using fanciful figures.
- Look for unusual transactions: Your first line of defence is your own eyes, so set aside time each week to look over the accounts. As your pore over the numbers, take stock of any transactions or calculations you don’t understand. It may not be for very much – $100 here or there in extra depreciation – but that’s how a lot of irregularities fly under the radar. Don’t be afraid to raise concerns with your accountant until you are satisfied.
- Delegate two accounts people: It’s harder to cook the books with two parties overseeing the numbers, so delegate or outsource to people who will be accountable to one another – an internal staff member reporting to an external accountant, for example. You’ll still have to review the books, but perhaps not as often.
- Hire an external auditor: If it’s been a long time since you’ve seen your balance sheet, or your suspicions have been sufficiently raised, bring in the experts. Auditors are skilled and experienced at finding financial irregularities, so don’t be afraid to seek out an independent eye to comb through your ledger.
Barricade Your Books
Satisfied you haven’t cooked your books? There are a few ways to minimise the risk of creative accounting occurring in your business going forward.
- Unify your accounting system: Using one accounting system across your business will decrease the likelihood of intentional ‘creativity’ or unintentional errors, especially if several people can review a definitive set of figures rather than two or more separate books. Make sure your system, such as QuickBooks Online, can be accessed internally and by external accountants.
- Conduct regular reviews: Make a practice of regularly reviewing your books to help you develop an understanding of current operational revenue and expenses, and to deter creative accounting. If a bad apple knows you conduct regular reviews, they’re less likely to try something. Other parties – professional accountants or fellow directors, for example – can support you. Devise an internal control checklist covering areas such as transactions, revenue and calculations, and divide review duties among those parties.
- Foster an ethical culture: Ensure employees are aware of the laws, ethics and proper procedures surrounding your bookkeeping and accounting practices. It helps if you have material ready for them to read and a clear process to follow. If you take ethics seriously, they are likely to as well.
Creative accounting is always motivated by something – from personal greed to money laundering and beyond. Unhappy employees are a warning sign, so don’t ignore the human side of fraud.
By implementing a series of checks and balances in your bookkeeping and accounting practices, you can support the detection and prevention of creative accounting in your organisation – and it may well save your business.
For more expert advice, visit our Small Business Centre or call 1800 917 771 to speak to one of our helpful representatives.
Information may be abridged and therefore incomplete. This document/information does not constitute, and should not be considered a substitute for, legal or financial advice. Each financial situation is different, the advice provided is intended to be general. Please contact your financial or legal advisors for information specific to your situation.