Accounting Fraud & Errors –

Serious Risk for the Small Business

Small business owners may not think much about accounting errors and accounting fraud, but they should. For several reasons, small businesses may actually be more vulnerable to accounting errors and fraud than big corporations. First, small businesses frequently lack the ample capitalization that major corporations have.

This often means that their small businesses get by on a pretty tight fund of operating capital. Losing money to errors or fraud for these small businesses can often mean the difference between solvency and closing the doors. Secondly, many small businesses lack the tight operational and auditing procedures that major corporations typically

Federal tax forms under a magnifying glass.

implement. It is very frequent to see small businesses with very loose cost control and fraud monitoring procedures.

So in sum, those businesses who very often can least afford the loss, most often do not take the necessary precautions to prevent it. This oversight is not always caused by sloppiness in business, it often is a function of operating on such a tight margin – formalized accounting and cost-control procedures are viewed by many small businesses as an unaffordable luxury.

This view is not too different from the view of some that they “cannot afford” insurance. Especially today as automation is bringing costs down significantly, you really need to take another look at your accounting procedures and get a good grasp of where you are and what it might cost to improve your processes.

A Few Basic Principles

One of the most common mistakes that small businesses make is to establish accounting and audit procedures that are totally dependent on the honesty and accuracy of a single person. This can seem to make sense in a small organization when each employee probably wears a number of hats. Redundancy costs money and takes time! However, you might find that with a little effort you can juggle other responsibilities around among several employees to make time for a back-up.

The best idea, of course, is for the equity partners always to know the financial state of the business. Not only does this policy minimize the risk of errors and fraud, it also can lead to some very creative insights into the business that you might not have realized if you weren’t on top of the numbers. You are in business to make money, after all! Another immediate way to make an impact is through automating invoice and procurement functions and using accounting software to track your business finances.

While fraud does occur – a lot more commonly than you might think – the biggest threat is simple unintentional error. The loss from errors can have a kind of “multiplier” as well. If you should underestimate your tax liability, for example, and underpay your tax obligation, you might find yourself liable for back taxes and penalties. Accounting software could pay for itself by preventing just a single such incident! Accounting software and automated invoice processing packages – among many other examples – are cheaper now than ever. Open-source software in many instances is available for free.

Stepping up your fraud and error monitoring in your business may not be as costly as you think. And ignoring the possibility of fraud and error might cost you a lot more than you realize. Come see us and let’s figure out if we can help you step up your game!