Dissatisfaction with a bookkeeper typically falls into one of three categories: suspicion of fraud, incompetence, or changes in business staffing requirements. The last one—a change in needs—can occur because of business growth or setback, and while this reason is straightforward enough, it also is the least common rationale for termination. This leaves us with fraud and incompetence. Is your bookkeeper a thief or a dunce? Both? Should you fire your bookkeeper?
Let’s take fraud first. In our experience most business owners are not deeply engaged in their businesses’ day-to-day bookkeeping routines, and as a result do not become aware that their bookkeeper is defrauding them until serious damage has already been done. If you are a business owner who falls into this category, there are a number of common red flags that can alert you to potentially fraudulent bookkeeping behavior:
• Your bookkeeper resists granting access to files or your accounting system, or resists any opportunity for another person to temporarily manage or check the books; • When asked for explanations, your bookkeeper becomes defensive or elusive to a degree that can’t be attributed to a mere communications problem; • Your books contain missing or (deliberately) confusing paper trails; • Bookkeeping entries are regularly overwritten or adjusted; • Your bookkeeper uses software to perform calculations that is outside of your accounting software, and which cannot be examined using your accounting software (for example, does your bookkeeper use Excel outside of your QuickBooks software?); • Your bookkeeper use extensive journal entries for common transactions; • Your bookkeeper keeps and manages passwords and access to all online banking and has changed from paper statements to online only; • Your bookkeeper does not regularly reconcile accounts.
As financially devastating as fraud can be, incompetence can be just as expensive, especially if your books have been managed so badly that they need to be reconstructed. Even a marginally incompetent bookkeeper can inflict serious damage such as by making a tax overpayment, generating inaccurate customer or vendor invoices that damage the reputation of your business, or failing to pay critical bills.
Similar to fraudulent activity, many business owners are only vaguely aware of the signs of incompetent bookkeeping, particularly those owners who possess only a passing knowledge of accounting and finance.
What does incompetent bookkeeping look like? Consider the following:
• Your bookkeeper can’t generate the correct financial reports; • Your business bounces checks because deposits aren’t made in a timely manner; • Your bookkeeper doesn’t approach you with ideas about how to improve the financial performance of your business; • You incur large CPA bills because your tax accountant is forced to clean up your books; • Your bookkeeper doesn’t reply responsively to your calls or emails; • You receive no feedback from your bookkeeper; • Your bookkeeper doesn’t understand basic accounting concepts; • Your bookkeeper underestimates the importance of a balance sheet or accurate chart of accounts; • You discover reconciliation discrepancies that suggest your bookkeeper is not detail oriented or is simply sloppy.
While neither list is exhaustive, they do give a sense of what to watch for. Keep in mind that certain red flags can signal both fraud and the appearance of incompetence. Many dishonest bookkeepers will camouflage their dishonesty by attributing fraudulent transactions to innocent mistakes. This strategy is very effective against business owners who tend to overlook mistakes, at least to the point where the pain of keeping an incompetent bookkeeper falls below the hassle of replacing the person.