Cooking the books is a cute term for something that’s quite the opposite of cute. You want to stay as far away from it as possible. Anyone involved in startup accounting and startup bookkeeping should learn aboutfinancial fraud and how to avoid it.

What is cooking the books?

Cooking the books is a slang term for committing financial fraud. It this will follow you through your whole career if you’re involved in it and, although this may seem obvious, remember:

Integrity first – do not commit financial fraud!  

Unfortunately, most people who are going to commit fraud are probably not going to take that advice or they have justified the criminal behavior in their minds already. According to the Wall Street Journal, employee fraud tends to rise during tough economic times, and small companies are more vulnerable because they don’t have internal processes to detect or prevent fraud.

What should you do if you discover fraudulent activities?

Confronting fraud is difficult and, understandably, nerve-wracking. What if you blow the whistle and people don’t take you seriously? What if you get fired? What if the person retaliates against you? Here are some steps you should take:

  1. Document the suspected fraud, including dates, times, and people involved.
  2. Write down all the details you can, since things that may seem trivial might be important later.
  3. Secure all this information and any evidence like receipts, statements, canceled checks, contracts, purchase orders, or other records.
  4. Alert the appropriate people.

Who can you talk to about the fraud?

If you are the person who discovers fraudulent activities, you’re in troubling and potentially overwhelming circumstances. However, although it may be scary, you really need to speak up:

  1. It may seem obvious, but go and talk to the CEO, the CFO, or your direct supervisor. Fraud is serious and you need to involve those in charge.
  2. If one of the people in charge is part of the financial deception and you are worried about retaliation, you can check in with your independent accounting firm, like Kruze, for advice. 
  3. You may also have to go straight to a director, such as one of theVCs who sits on the board. 

Don’t ignore minor incidents!

When someone is cooking the books, small amounts can often be ignored or chalked up to human error. However, minor fraudulent transactions often mean it’s happening elsewhere in the organization but on a larger scale. Whatever the amount is, you don’t want to be seen as an accomplice. So, if you discover fraud anywhere within the startup, please blow that whistle!

How to avoid financial fraud in startup accounting?

You can never eliminate the chances of someone resorting to financial fraud, but you can take some actions to minimize the risk. Contracting with an outside accounting firm means there are checks and balances in place, as well as another set of eyes on the company’s financial transactions, which reduce opportunities for shady activities. Some other tips:

  • Don’t let one employee handle the accounting and bookkeeping. Startups, because of their size, don’t always have two or more employees handling accounting. We recommend that a startup should always have an independent accounting firm working with them until there are several people on staff responsible for the organization’s finance and accounting.
  • Maintain internal controls and processes, like 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 as startup accountant, if you encounter someone trying to cook the books then it’s your duty to speak up. Document your concerns and take them to the CEO, the CFO, or your immediate supervisor. If there is a chance those people might be involved, then 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. If you have further questions on financial fraud, taxes, or startup accounting, please contact us.

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