Bookkeepers behaving badly? Spot red flags before it's too late

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By Janet Berry-Johnson | writer

When fraud strikes, it often hits small businesses and nonprofits the hardest. In some cases, the thief is the trusted bookkeeper. Jackie Rockwell, CEO of Brass Jacks, an online school for aspiring bookkeepers, has seen this scenario play out too many times.

Here, she shares practical red flags to watch for, the steps accountants can take to help clients prevent embezzlement and what to do when suspicion turns into something more. If you’ve ever assumed “it could never happen here,” this conversation might change your mind.

There have been several news stories lately about bookkeepers stealing from schools and small businesses. What red flags should accountants watch for to help their clients detect fraud early?

Several red flags can indicate embezzlement. Mainly, if the bookkeeper holds onto the books so tightly and won't let anyone else look at them, there could be something suspicious going on. Other red flags include not getting financial reports or not getting answers to questions you have on a financial report. Bookkeeping should be transparent. If you're getting any pushback when asking questions about the books, that’s an immediate red flag, and you should investigate further.

What internal controls or procedures can accountants recommend to reduce the risk of employee fraud?

Every company is different, but we recommend some basic internal controls to protect the business. These can be either preventive or detective measures. Preventive measures—like ensuring the bookkeeper doesn’t sign checks, comparing merchant service reports to the company's financial statements and policies for who opens the mail and makes deposits—stop embezzlement from occurring. Detective internal controls help detect if embezzlement is occurring. They include things like comparing payroll summary reports to direct deposit records, reviewing canceled checks and reconciling credit card statements.

How can accountants proactively educate their clients about fraud prevention?

Many business owners are completely blindsided when they fall victim to fraud or embezzlement. Accountants can help protect their clients by informing them of these threats to their business. They could also include fraud and embezzlement prevention services in their packages. Educating clients about why they shouldn't blindly trust anyone who handles their money is vital, and they can do that by telling these stories of fraud and embezzlement. Most accountants don't automatically offer this level of service to their clients. It’s helpful for business owners to be aware that no one is looking for fraud or embezzlement and it's something they need to do proactively.

Last year, my business partner, Jackie Shaw, and I recorded a conversation for our YouTube channel where we discussed a local business that fell victim to embezzlement. Three couples owned the company and one of the couples committed the theft. It was devastating to the other owners who had put complete trust in their business partner.

Once an employer suspects fraud, what immediate steps can they take, and how can accountants assist in investigating and resolving the situation?

If you suspect fraud, contact an accountant immediately. They will advise you on how to proceed. You don't want to tip off the employee that you suspect them of fraud because they may try to destroy the evidence.

I once worked with a company and explained to the business owner that I was having a hard time getting the information I needed. The next time I came into the office, the computer I had been using for their bookkeeping was sitting in a puddle of water. The culprit knew I was onto something and tried to destroy the evidence.

This interview was edited for brevity and clarity.

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