As much as we don’t like to believe it, fraud and theft in business are not reserved for publicly traded big corporations. In fact, fraud often hits close to home, among small businesses and under the nose of the most hardworking entrepreneurs.

The  3 ½ Accounting Fraud Scenarios

Here are  3 ½ scenarios I’ve personally seen happen more than once in my career.

#1: Messy accounting records

Messy accounting records and an ongoing effort by the bookkeeper to “sort things out.” This is probably the oldest trick in the book, but also the easiest to learn and get away with: agencies are great at being creative, but rarely pay attention to their finances. As a result, employees prey on agencies that do not have the history of keeping a clean set of books and use the messy record to hide their actions from detection.

The more complex the fraudsters make the situation appear, the less likely the entrepreneur will make an effort to sort things out or, worse, think they can do without the bookkeeper’s ongoing efforts. The inability to explain financial position as well as how “things work” clearly are telltale signs to look for as well.

#2: Lapping and skimming

Stealing from the agency’s customers, delaying detection, then writing it off over a period of time. In school, they taught us that these tricks are called lapping and skimming and do not happen simultaneously. However, in real life, I’ve always seen a mix of both. It’s an easy trick to carry out when a single person is responsible for depositing checks and managing QuickBooks files.

Without a proper check and balance process, it is easy for the bookkeeper to pocket one of the customer’s payments and either use it later or another customer’s check to cover the open invoice. The bookkeeper can keep repeating this process until she gets an opportunity to write off the invoice. Even if the owner reviews the AR Aging statement religiously, he will never suspect anything because the customer’s account will always remain current on record.

#3: Stealing from Reimbursement

Hiding personal expenses among company expenses is probably the most popular trick in recent years. With the shift in company culture and increased convenience of online shopping, many agency employees are given the ability to purchase office supplies and goods over the Internet.

Since most online retail or banking systems like Amazon or Paypal don’t provide transaction details through the traditional bank statement, it is super easy to hide an extra $50 to $2,000 personal order among the things that the agency purchased: an extra case of coconut water with the company’s snack purchase … an electric razor among company’s weekly Amazon order … or even a shiny new MacBook Air with the latest Retina Display order from Apple.

And, if you think the coconut water is negligible and the MacBook Air definitely detectable, you couldn’t be further from the truth. Differences of a few hundred dollars are often overlooked from the 30,000-foot view and go undetected for years – especially in a growing company.

#3 1/2: Inaccurate reimbursement reports

Employees submitting inaccurate reimbursement reports. A slight variation from no. 3 but the idea is the same – and this one is accessible by everyone in the agency. Most agencies we come across have a semi-put together expense reimbursement policy that is governed loosely by an administrative staff.

Employees often ask to bypass the official review process (if there is one) in order to be paid quickly since out-of-pocket expenses can greatly affect their personal cash flow. As a result, it is common to see errors such as double or over-reimbursement. Without a good process and set of careful eyes to speed up the review process, fraud is often overlooked and difficult to catch. For example, we’ve seen the same sets of receipts being reused over a rolling 3 months by employees to obtain company reimbursements.

Be prepared for the worst

I am not saying all employees or bookkeepers are criminals, but it would be smart to be aware and mindful of these possibilities when running your agency. See 3 Things You Can Do Today to Greatly Reduce Theft in Your Business.

Let’s face it: it’s STILL fraud and anyone who owns a business or has a stake in the bottom line must be more aware of the ways to prevent fraud from happening … before it’s too late.

Truth is, if fraud goes undetected for even a short period of time, the consequences can be devastating to a company’s ability to stay around another day, not only to keep doing the work they set out to do but to maintain their integrity and dignity.