How to Avoid Financial Fraud in Startup Accounting and Bookkeeping

Financial fraud, also known as "cooking the books," is a serious issue that every startup founder and accountant should be aware of. This illegal act can have severe consequences and follow you throughout your career. In this blog post, we will cover what cooking the books means, what to do if you discover fraudulent activities, how to talk about the fraud, how to avoid financial fraud in startup accounting, and what to do if things don't add up.

What is Cooking the Books?

Cooking the books is a slang term for committing financial fraud. This criminal behavior can ruin your reputation and have severe consequences, so it's important to stay away from it at all costs. Unfortunately, during tough economic times, employee fraud tends to rise, and small companies are more vulnerable to financial fraud as they don't have internal processes to detect or prevent it.

What to Do If You Discover Fraudulent Activities

If you discover fraudulent activities in your startup, it's crucial to take action. Confronting fraud can be difficult and nerve-wracking, but it's important to do so to protect your company. Here are some steps you should take:

• Document the suspected fraud, including dates, times, and people involved.
• Write down all the details you can, including any evidence such as receipts, statements, canceled checks, contracts, purchase orders, or other records.
• Secure the information and evidence.
• Alert the appropriate people.

Who to Talk To About the Fraud

If you discover fraudulent activities, it's essential to speak up. You can go to the CEO, the CFO, or your direct supervisor. If one of these people is involved in the financial deception and you're worried about retaliation, you can check in with an independent accounting firm for advice. If the CEO, the CFO, or your direct supervisor are involved, you may have to go straight to a director on the board of directors.

Don't Ignore Minor Incidents

Minor fraudulent transactions often mean it's happening elsewhere in the organization on a larger scale. So, if you discover fraud anywhere within the startup, it's important to blow the whistle and take action.

How to Avoid Financial Fraud in Startup Accounting

You can never eliminate the chances of someone committing financial fraud, but you can take actions to minimize the risk. Contracting with an outside accounting firm means there are checks and balances in place, reducing opportunities for shady activities. Here are some tips to minimize the risk of financial fraud in startup accounting:

• Don't let one employee handle the accounting and bookkeeping. A startup should always have an independent accounting firm working with them until there are several people on staff responsible for finance and accounting.
• Maintain internal controls and processes, such as multi-person sign-off on accounting functions, tracking all financial transactions, frequently auditing high-risk areas, and using accounting software to track user activity.
• Watch your business bank accounts. Online banking dashboards make it easy to check account activity, so you can look for unusual transactions, missing or out-of-order checks, and payments to unrecognized recipients.

If Things Don't Add Up, Take Action

As a startup accountant, it's your duty to speak up if you encounter someone trying to cook the books. Document your concerns and take them to the CEO, the CFO, or your immediate supervisor. If those people might be involved, go to the board of directors. The board of directors are fiduciaries of their venture capital fund and are obligated to investigate and disclose any type of underhanded activity.

In conclusion, financial fraud is a serious issue and can have serious consequences for everyone involved. It is important for those in startup accounting and bookkeeping to be aware of financial fraud and to learn how to avoid it. As a startup accountant, it is important to have a deep understanding of financial fraud and to take steps to prevent it from happening.