As businesses put preventive measures in place, fraudsters also adapt and learn new ways to target companies. According to a survey conducted in 2024, 90% of businesses in the US lost up to 9% of revenue due to fraud. The majority of respondents also pointed out the use of AI in fraudulent attacks.
Preventing fraud is critical for SMEs because even small mistakes can have significant consequences. One of the most vulnerable areas is financial management, where errors or oversight can lead to costly losses. By understanding the common causes of fraud and implementing strong bookkeeping and accounting practices, business owners can safeguard their companies and maintain financial stability.
Let’s look at some common causes of fraud and how accounting and bookkeeping can help prevent revenue losses for businesses with improved financial management.
Common causes of fraud
The three most common causes of fraud are:
- Corruption & misconduct: Financial statement fraud is one of the most common types of business fraud, and it is caused by the intentional misconduct of executive-level business employees. Employee corruption also leads to fraud cases where company assets are used for personal benefit.
- Weak internal controls: When a single employee is handling the work of multiple people at once, they will fail to assess and evaluate potential risks within the company adequately. Potential issues in financial management will also go unnoticed because of weak internal controls, exposing the business to fraud attacks.
- Financial mismanagement: Poor financial management can make your business prone to attacks from fraudsters. Incomplete internal records can also cause problems during audits.
How accounting and bookkeeping services can prevent fraud and financial mismanagement
Bookkeeping and accounting services are crucial for the survival of a company. They can help improve financial management and reduce the risk of fraud by doing the following:
1. Maintaining accurate financial records
A business has to handle multiple transactions daily, and a small error in recording them can disrupt the whole balance sheet. A qualified bookkeeper knows the importance of maintaining accurate and up-to-date financial records.
Bookkeepers eliminate the possibility of data manipulation by recording every transaction in real-time. They also help business owners get an accurate picture of the company’s current finances so they can make future plans accordingly.
2. Utilizing advanced accounting software
Professional bookkeepers implement and manage modern accounting software that automates financial tracking, reduces manual errors, and enhances data security. By integrating cloud-based platforms and encryption tools, they ensure financial records remain accurate, transparent, and protected from fraud. Leveraging these technologies also improves compliance by maintaining real-time transaction records and streamlining audit processes.
3. Implementing internal controls
Under a well-established accounting system, every employee’s duties are divided fairly to avoid conflicts of interest. Accountants also conduct internal audits to ensure the financial records are error-free and can withstand federal authorities’ scrutiny.
4. Detecting irregularities
By implementing the practice of reconciliation, accountants ensure that the financial information recorded in different documents is accurate. Reconciliation also allows accountants to check if the data remains consistent across multiple sources. Through this process, accountants can detect corruption early on and help the organization avoid losses.
5. Ensuring Compliance
Accurate bookkeeping plays a critical role in keeping businesses compliant with federal, state, and industry-specific financial regulations. Properly maintained financial records ensure adherence to Generally Accepted Accounting Principles (GAAP), tax laws, and reporting standards set by regulatory bodies such as the IRS and state revenue departments. Professional bookkeepers stay updated on regulatory changes, helping businesses adjust their financial practices to remain compliant and avoid unnecessary risks.
How to prevent fraud and mismanagement?
By adopting the following practices, you can protect your business from fraud and financial mismanagement:
1. Regular staff training
As the methods of committing fraud are changing, your company’s employees must understand the common risk factors. By regularly training your staff about fraud risks and preventive strategies, you can fairly reduce the chances of your company falling prey to fraud and schemes.
Training sessions will also educate your employees about their duties towards the company and help them avoid making mistakes that can be costly for the business.
2. Establishing a culture of transparency
It is quite common for employees to be hesitant about speaking up when they see something wrong. Many employees fear the response of their colleagues and higher management. Reward whistleblowers to promote ethical behavior in the company.
If you reward those who report financial mismanagement or corruption, you will be helping your employees find the courage to speak up.
3. Hiring professional bookkeepers and accountants
While you can read about standard accounting and bookkeeping practices, it is best to leave the actual work to the professionals. You can get online accounting and bookkeeping services to save money instead of hiring an in-house team to improve your financial management.
Professional accounting and bookkeeping services, like CoCountant, can help your company maintain accurate records, avoid penalties, and reduce the risk of fraud. With improved financial management, you will also have an accurate picture of your company’s financial health and be able to plan for the future accordingly.
The takeaway?
Fraud attacks are becoming more advanced and can be deadly for small businesses and startups. However, your company can remain protected from fraudsters with improved financial management and professional accounting and bookkeeping services. Adopt the abovementioned practices and outsource your accounting and bookkeeping to safeguard your company against fraud.
