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Small business owners and other professionals often have a concern over confidentiality and fraud when they are considering using an external service to perform their accounting or bookkeeping function. And, admittedly, the question is an important one. What really surprises me is that I rarely hear it asked in relation to hiring internal accountants — the alternative scenario that actually leaves business much more exposed to theft and fraud.

Ok, you might think, so how does Credo do its own books?  Do you take your own advice?  Well, yes and no.  Do I do my own bookkeeping?  No, I don’t.  Even though I am an accountant by trade and could of course do it myself, it is not a good use of my time.  I, like other business owners, have to spend as much time on my customers’ businesses and working on the quality of my own business that it is not something that is a good return on investment for me (to spend my time on).

However, I do take advantage of my own knowledge of internal controls, segregation of duties, and how to spot irregularities.  I use internal Credo employees, we segregate duties, and we have checks and balances.  Nobody is trusted 100%.  So, in a sense, I outsource, but it would not be 100% true to say that I truly outsource.  However, I would recommend to any small business that needs less than a full-time, on-site accountant, to outsource.  And, with technology, security, cloud accounting systems, etc. this is quickly becoming the clearer choice.  Personally, I believe that bigger and bigger companies will begin migrating toward an outsourcing model.  It is more secure, more cost effective, and there are then less employees to worry about (which are obviously costly and time consuming).

Clearly, as compared with using an internal accountant, using Credo or some other external service has built-in protections that significantly reduce the potential for fraud.

For example, for clients that use Credo:

  1. There are barriers to access: Credos’ associates and managers typically don’t have access to cash, checks or credit/bank cards. This creates an immediate and significant barrier to fraud.
  2. Oversight and transparency: Every Credo client is served by more than one Credo employee, and often times, the entire team. This critical checks-and-balances model is cost-prohibitive for small businesses to replicate internally.  And, as a forensic expert who has roots in auditing, I know that collusion is really the most effective way to commit fraud, and, it is much more rare because conspiracies are more often based on paranoia rather than fact.
  3. Electronic safeguards: With our model, all financial-related activities are tracked and reviewed electronically. The owner can see all communication and actions of the accountant, who can in turn monitor the businesses’ employees. Every employee knows that activities are recorded and reviewed by a 3rd outside party with no vested interest in anything other than keeping accurate books and records and alerting the business owner to any strange activity. The perception of continual monitoring is a proven combatant to fraud.

Most fraud cases begin simply and incrementally, which means they’re likely to go unnoticed in a small business staffed by trusted employees.  DO NOT test this.  You have to be aware of what is going on.  Fraud in small business is very commonplace…more common than you realize – that someone you trust will steal from you or try to deceive you.

I am formally trained in accounting, auditing, and forensics.  I have employees that I trust and we have checks and balances, but I still consider this to be a risk at my own company that I need to actively monitor.  You can only do so much.  You can’t be 100% sure.  But, you need to fight to get that % as close to 100 as possible.

The ultimate costs and consequences of fraud are devastating.  According to the Association of Certified Fraud Examiners’ 2014 Report to the Nations, the estimated median loss due to fraud was $145,000!! The report added that “the smallest organizations tend to suffer disproportionately large losses due to occupational fraud.”

Fraud Magazine‘s article, “Small business fraud and the trusted employee,” provides a hypothetical example of fraud in a small business setting. I recommend you look it up and read through it.

Ever seen the movie, “Catch Me If You Can” with Tom Hanks?  Another book to read has been written by Frank Abignale (played by Leonardo DiCaprio in the movie) called “The Art of the Steal”.  If you’re not convinced that fraud is a risk, read that book to see how easy it is to commit.  I think it will convince you.

Dan Lucas
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