4 Ways to Make Sure Clients Are Not Being Scammed By Employees

4 Ways to Make Sure Clients Are Not Being Scammed By Employees

CFO.University note: Tiffany wrote this article for CPA’s preparing tax returns but it is rich in learning for financial executives and insightful on how we can work with our tax preparers to help prevent fraud at our firms.

It’s that time of year again. You are fully in the swing of tax season, counting the days until April 18, frustrated that your clients are not bringing in their financial documents. Have you considered that the delay may be the result of their inability to get financial information from their trusted bookkeeper?

I recently had a conversation with a potential client whose bookkeeper stalls each time he asks her for documents. He described it as “pulling teeth” to get anything from her. His CPA urged him to call me because the client feels that cash flow “just doesn’t seem right” even though sales have increased in the last year. When I told him I’d be happy to help and perhaps we should just start with the bank statements, cancelled check images and QuickBooks, the phone went silent.

“I can’t ask her for that,” she said. “She’ll think that I don’t trust her if I start asking questions.” When I told him that I was concerned that some of what he was telling me are common indicators of employee embezzlement, he scoffed. “She would never do that to me.”

These comments are not uncommon for me to hear in my forensic accounting office and they are the primary reason why frauds go undetected for so long.

The first rule in understanding employee embezzlement is understanding that perpetrators rely on their ability to be liked and trusted to gain access to your client’s funds. If you asked any of my clients, before the fraud was found, who the most trusted employees in their organization were, the fraudster would be at the top of the list.

The second rule in understanding employee embezzlement is understanding that fraudsters will use everything from, “I’m too busy” to “How dare you ask me questions” to “You don’t trust me?” to resist providing documents to the very business owners who provide them steady employment. Our clients are nice people who are relieved to have someone so trustworthy to do the involved work of daily accounting necessary to run a business. They are so nice, in fact, that they are often afraid to “rock the boat” with their trusted bookkeepers.

On average, asset misappropriation schemes are in excess of $150,000 and have been ongoing for 18 months before they are detected. It is my contention that CPAs who prepare taxes for small business could be serving as a first line of defense in uncovering these schemes faster. As your small business clients come in this year to drop off documents or pick up their tax returns, I encourage you to consider adding value to those engagements, and your clients’ businesses, by considering the following as part of your annual tax engagement:

1. If the client uses QuickBooks, consider running an Audit Trail Report before you run their trial balance report. The features within this report bold and italicize transactions that have been changed or deleted. Identify whether any changed or deleted transactions look unusual or may indicate fraud could be occurring (e.g. deleted deposits, a check written to an employee or suspicious vendor with the payee name later changed to a legitimate vendor, payroll checks changed).

2. Ask the client to bring in their bank statements and cancelled check images for the 12-month tax period. Review those statements to ensure that all debit transactions and payee names on cleared checks are for your client’s business purposes (i.e. verify there is no unauthorized use of your client’s funds).

3. Verify that sales posted to your client’s ledger match deposits to their bank account. If there are shortages, could this be a sign of a potential cash/check skimming scheme?

4. Have a brief conversation with your clients on the importance of simple but effective controls for the prevention of fraud (e.g. review bank statements and cancelled check images, separating customer invoicing from banking duties, reviewing payroll reports after payroll is processed).

You may receive pushback from your clients at first, but arm yourself with the facts and remind them that these steps are necessary to avoid suffering the heartbreak or financial loss associated with a thief in their company.

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