Overview: Fraud attacks can happen to any business, no matter the size. But smart accounting practices can play a major role in decreasing its potential negative impacts. Read on to learn about the role of accounting in fraud prevention for small businesses!
Fraud is a serious problem that can impact the financial stability of small businesses. It may be impossible to completely prevent fraud — scammers are always coming up with new schemes and methods. But there are steps that small businesses can take to reduce the risk of fraud.
One of those steps is having an effective accounting system. In this blog post, we will discuss the role of accounting in fraud prevention for small businesses.
What Is Fraud?
Let’s start with the tried and true trick of turning to the dictionary: Merriam-Webster defines fraud as “intentional perversion of truth in order to induce another to part with something of value or to surrender a legal right.”
When it comes to business fraud, we’re talking about intentional acts of deception that are done to obtain financial gain. Fraud in business can take many forms, including embezzlement, check forgery, credit card fraud, and others. Small businesses are particularly vulnerable to fraud because they typically have limited resources and fewer internal controls when compared to large corporations.
A 2023 report by the Association of Financial Professionals shows that fraud isn’t going away any time soon. Their survey found that in 2022, 65% of organizations either fell victim to payments fraud attacks, or experienced attempted fraud.
They also found that 44% of these organizations were unable to recoup the funds they lost from these fraud attacks! It’s clear that businesses of all sizes need to be aware of, and vigilant about, the threat of fraud.
>> Related Reading: 5 Ways to Spot Small Business Fraud
The Role of Accounting in Fraud Prevention
Accounting is a critical tool in fraud prevention for small businesses. A well-designed accounting system can help identify and prevent fraud. Here are some ways accounting can help:
Internal Controls: Internal controls are policies and procedures that are designed to prevent and detect fraud. Examples of internal controls include segregation of duties (see below for more on that), requiring dual signatures on checks, and performing regular audits. Small businesses should establish internal controls that are appropriate for their size and complexity.
Segregation of Duties: Segregation of duties is a key principle of internal control. It means that no single individual should have complete control over a transaction from beginning to end.
For example, the person who receives cash from a customer should not be the same person who records that transaction in the accounting system. Separating these duties creates accountability and makes it more difficult for an individual to commit fraud without being detected.
Reconciliation of Accounts: Reconciling accounts is an important step in detecting and preventing fraud. By reconciling bank accounts, credit card accounts, and other accounts, discrepancies can be identified and investigated, and steps can be taken to address the situation.
For example, if an employee is using a company credit card for personal expenses, the discrepancy will be identified during the reconciliation process by the entity who handles the company accounting, and appropriate action can be taken in a timely fashion.
>> Related Reading: Why Is Reconciliation Important in Accounting?
Record Keeping: Accurate record-keeping is essential in fraud prevention. By maintaining accurate records, a business can identify discrepancies quickly and investigate them further if necessary. It’s also important to keep records for a period of time as required by law.
Another good reason to maintain comprehensive records? Small businesses can use them as evidence to defend against outside allegations of fraud.
Fraud Detection: Accounting is also important to the ongoing goal of detecting fraud. For example, if an employee is embezzling funds, it’s likely that there will be irregularities in the accounting records. With careful, regular analysis of financial records, these irregularities can be identified and investigated.
The Benefits of Hiring an Outside Accounting Firm to Aid in Fraud Prevention
An outside accounting firm can play a vital role in helping prevent fraud, especially for small businesses. Here are some ways an accounting firm can help:
Assessment of Internal Controls: An accounting firm can perform an assessment of the internal control systems that a small business has in place. They can review the existing policies and procedures to identify any weaknesses or areas where improvements can be made, and recommend changes and best practices that can help prevent fraud.
Monitoring of Financial Transactions: An accounting firm can monitor financial transactions to identify any unusual activity. They can review bank statements, credit card statements, and other financial records to identify any discrepancies or irregularities.
This monitoring can help detect fraudulent activity early, before it causes significant damage to the business. And an outside accounting firm can devote more time and precision to this monitoring than the in-house staff of a small business might have the capacity for.
Audits: An accounting firm can perform audits to ensure that the small business’s financial records are accurate and complete. This is valuable for a business’s finances in general, but for the purposes of fraud detection and prevention, audits can also help identify areas where internal controls can be improved.
An accounting firm can provide recommendations for improving internal controls and help the small business implement those recommendations.
Training: As a supplement to reviewing the state of a company’s financial systems, an accounting firm can provide training to the small business’s employees in the area of fraud prevention.
They can educate employees on how to identify fraudulent activity and how to report it, and they can inform employees about best practices for internal controls and record-keeping.
Forensic Accounting: If fraud has already occurred, an accounting firm can perform forensic accounting to identify the extent of the fraud and determine how it happened and who was responsible. Forensic accounting can also help small businesses recover lost funds and prevent similar fraud from occurring in the future.
>> Related Reading: Forensic Accounting Overview
Accounting plays a crucial role in fraud prevention for small businesses. By implementing effective accounting practices, small businesses can reduce the risk of fraud and maintain financial stability — and they can be prepared to respond when fraud occurs.
Accounting practices such as segregation of duties, reconciliation of accounts, detailed record-keeping, and fraud detection can help prevent fraud from hurting your business. It’s important for small businesses to establish an accounting system that is appropriate for their size and complexity to ensure their financial security.
Bringing in an outside accounting firm can also help ensure that a business is protected against fraud. If you’re need of an experienced accounting firm you can trust, we’d be happy to hear from you. Please feel free to contact Prospect Financial Services today!