Accounting fraud is a bigger problem than most people realize. According to a report from The Association of Certified Fraud Examiners, American businesses lost 5% of revenue to fraud in 2018. More alarmingly, private companies and small businesses were the most likely victims, with 42% of them falling victim to fraud. The median losses in these instances were $164,000, which is enough to put a lot of small and even midsize companies out of businesses.
The reason fraud is so common and consequential at smaller enterprises is due to the lack of internal controls. Small accounting departments can fall into informal practices that make fraud harder to identify. Worse is when accounting is handled by just one person because there’s essentially no oversight at all.
Larger companies have mechanisms in place for preventing fraud and eliminating it early. Unfortunately, this kind of proactive approach takes resources – staff, formal policies, technology, etc – that are in short supply at most small companies. Instead of guarding against fraud, many businesses gamble that it won’t happen. As the stats above suggest, it’s a bad bet.
Instead of investing internally on fraud prevention, many cautious businesses rely on outsourced accountants. Outsourcing is often seen as a way to lower costs or boost efficiency, but it can also upgrade security and oversight. Here’s how:
Get a Second Set of Eyes on the Books
Some companies work with both in-house and outsourced accountants. It’s a smart strategy because the outsourced accountants can check and verify that everything is done in-house is completely above board. Even when there is no reason not to trust the in-house accountants, having someone objective double check the books helps keep everyone accountable.
Enlist Ethical Professionals for Accounting
Outsourced accounting teams are made up of highly-trained and experienced professionals with a deep commitment to financial ethics and best practices. They understand how to root out evidence of fraud no matter how well it’s hidden. They can also be trusted to handle any accounting workload in a way that is completely honest and compliant. Essentially, outsourced accountants can always be trusted.
Focus on Positives Instead of Negatives
Fraud is distracting at best and disastrous at worst. Trying to prevent it is an ongoing effort that only becomes harder if and when fraud is discovered. Entrepreneurs could either accept that dealing with fraud is the cost of doing business. Or they could rely on an outsourcing firm to solve the problem. If they choose the latter, they can focus on growing the business instead of keeping it from stumbling.
It’s important to acknowledge that fraud can happen at any organization regardless of how small, long-running, or tight-knit the team is. Given how ubiquitous this particular risk is, every business owner must make an effort to manage it. Outsourcing is the ideal solution, primarily because it works, but also because it’s preferable to all the alternatives.
When you’re ready to continue the conversation about outsourcing, contact the experts at CDH.