An Accountant's Guide to Preventing Fraud in Your Financial Systems

In an increasingly interconnected electronic financial world, there are more opportunities for financial fraud to occur. One example is the ‘Lion’s Share’ pyramid scheme, where individuals invest money in the hope of greater returns. We are increasingly seeing bank-related scams, like this Australian man who lost his entire life savings by providing his bank information to a scammer.

Financial fraud and scams come in a lot of different flavors now. Sometimes it’s hard to keep up with the new ways scammers use to defraud you of your money. Fortunately, there are ways to detect fraud and prevent yourself from becoming a victim.

Some of these tips may be of great use to business owners who are more exposed to financial fraud compared to a salaried employee.

Prevention is better than cure. If you’re good at identifying it in the early stages, you shouldn’t have to worry about spotting fraudulent transactions in your regular transactions.

Identifying financial fraud

Generally speaking — if something is too good to be true, it probably isn’t true.

As a general rule of thumb, avoid clicking on links that advertize investments that promise huge returns on minimal investments. Be especially careful if there is any mention of crypto. If you get any emails from anyone talking to you about ‘investments’ — that can go straight to your spam folder. Suffice it to say reputable investment platforms won’t send you emails if you haven’t signed up for their mailing list.

That being said, be careful of emails from investment platforms that you do use — some sophisticated scammers will create fake emails that look official to extract your details. Take note of the address they are sent from. If it looks different to the usual address, contact your investment platform using the official channels and determine if the email is legitimate.

Any investment that sounds too good to be true is designed to appeal to one of our basest emotions: Greed and/or desperation. Scammers will use emotional hot buttons to get you to give up your hard-earned cash in return for promised returns. When presented with an investment opportunity too good to be passed up on, always remember:

‘If you don’t invest now, all you’re missing out on is the opportunity of maybe getting something later.’

If you do invest and things go south, well, that’s all your money gone.

A close encounter with financial fraud

Very recently I personally experienced what I consider a close encounter with a fraudster. An individual on LinkedIn reached out to me, asking to try their new financial software. I’m always keen to try new financial software (it’s part of my job as an accountant), so I went to their website to sign up for the free trial.

However, my ultra-skeptic accountant training kicked in as I noticed a few red flags:

• Firstly, this company was offering $89.99 a month to use their software, but if you paid $45.99 you could use their software for a lifetime subscription. Why is the lifetime subscription cheaper than the monthly subscription? Very strange.
• Secondly, when I was about to sign up for the free trial, they insisted on me providing my credit card details to the website. Sensing a scam, I decided to do additional snooping to find out if the software was legit.

I did an image search on the profile picture of the person who reached out to me on LinkedIn. I got several hits back showing me that it was a stock image used by several different websites. After that, I closed the website, added this person to my block list and never looked back!

I’ll never actually know if the website was fraudulent. But my instinct was telling me something was off. Even if I was wrong, I only lost out on a free trial. But if I was right, I could have ended up losing more!

Spotting if financial fraud has happened

Well, prevention is better than cure. If you’re good at identifying it in the early stages, you shouldn’t have to worry about spotting fraudulent transactions in your regular transactions. However, there are some habits you can build to quickly spot fraudulent transactions if they happen.

Review your transactions regularly

At the very least, you should be reviewing your bank and/or credit card transactions on a monthly basis. This helps you identify any ‘weird’ looking transactions. If you spot anything strange or out of place, you can immediately call your bank to get more information. Things to look out for can include:

• A payee that you don’t usually use
• An unexplained amount that is greater than $100
• A recurring transaction to a payee that you’ve never seen before

If you’re using financial software like PocketSmith, which connects to your bank feeds, this process is even easier. Plus, you can program rules for PocketSmith to categorize your regular payees automatically. This way, the irregular payees will be left uncategorized and you can review them for their legitimacy.

Keep track of your recurring payments

Insurance, software, and music service subscriptions are all examples of payments that you set up to occur regularly. If you know exactly what will be charged to your bill every month, it is easy to see any recurring payments that are out of the ordinary.

However, it is a good idea to keep recurring payments to a manageable number. Focus on the important stuff. Like insurance payments, rates payments and software subscriptions (like that PocketSmith subscription!). Avoid taking Buy Now Pay Later schemes which create even more recurring payments for you to keep track of. These are especially difficult to monitor because the values differ, and they can all add up really quickly!

Involve your partner in spending discussions

I get it, finances are a touchy subject. Some couples avoid saying the ‘F’ word (finances) around each other. But if you spot any weird spends during your transaction review, you need to discuss it with your partner first (if you have one). This way, you can ensure that you’re on the same page financially and they can confirm if any of your suspicions about the transaction are true.

Tangents for financial fraud

Not all scammers are dodgy email bots promising astounding returns for little to no investment. Sometimes it’s the folks closest to us that take advantage of our financial situation. Here are some less-talked-about tangents for financial fraud.

Your romantic partner

I’m not even talking about catfish scams. In my time as an accountant, I’ve seen a lot of relationships fall apart because of money. Often it’s because one partner has a don’t-care attitude to money and racks up the credit card bills. Then the more fiscally responsible partner has to shoulder the burden of debt.

When a breakup happens, spiteful partners can (and do) utilize their connection to your bank accounts to withdraw the money. They may even spend it on large purchases like cars or boats without you even knowing. I believe that in any relationship, having honest conversations about finance is important. An aversion to talking about money is often (in my opinion) a financial red flag in any relationship.

The best way you can protect yourself is to have a separate account that only you have access to. This can be a separate personal or even your business account. This way, even if things go south, your ex-partner can’t access funds that you’ve put away.

Your family members

This is especially true for older individuals who require care. I’ve read a lot of stories of nephews, grandchildren and even children taking advantage of their older relatives. This happens because they have access to their older relatives’ bank cards, passwords and cash.

If you have an older relative whom you feel is being taken advantage of, you should say something. Ask to see their bank transaction details. Better yet, help them set up a PocketSmith account that connects to their bank feed, which you can monitor to ensure that their money is being spent correctly.

As always, trust and communication are key to countering fraudulent activity. You need to be open with your older relatives and the person who is looking after them. Be sure that you are all on the same page when it comes to managing the older relative’s finances.

Your employees

Especially true for business owners! Even big corporations like Microsoft are not immune to this. Employees can sometimes occupy a trusted position in your business and take advantage of that position to exploit your company. Basically, any staff position that comes into contact with your business funds has the ability to defraud your business.

Examples include cash register operators, servers, secretaries, salespeople and, yes, accountants. Fortunately, there are a lot of studies dedicated to developing strong internal controls to reduce the likelihood of fraud happening. Here are some suggestions for internal controls you can implement in your business.

• Security cameras on the premises will deter most would-be offenders from pocketing cash from customers.
• Having two signatories on the bank account will also prevent large sums of money from being paid out by a single person.
• You can have customers wire funds directly to your bank account instead of going through your salespeople.
• If you have an accountant who pays your bills and suppliers for you, make sure to set a limit on the size of the transactions they can make. If you can’t afford another accountant to check their work, you must check the accountant’s work yourself!

Your business partners

In a slight variation on the investment scam, your business partner may convince you to invest in a venture together. However, said venture turned out to be a dud. What’s more, they claim a stake in the money you put in, saying that they’ve been working hard on the business and deserve a wage, even though the business isn’t making any money.

As an accountant, I’ve seen many business partnerships go sour. I’ve even had to step in and mediate for shareholders who were accusing each other of financial mismanagement. Here are some tips I’ve learned to protect yourself from fraudulent business partners.

• Make sure you are a signatory to the business’ bank accounts. This prevents your partner from spending the money as they please.
• Ensure that all partners sign a shareholder (or partnership) agreement which clearly outlines the roles, responsibilities and financial contributions of each partner.
• If any partner wishes to work for the business and receive a wage, they must get, in writing, clear approval from all the other business partners for this to happen.

Scammers are becoming more sophisticated, and every day there is a new crypto-investment scam popping up. The best way to protect yourself is by educating yourself.

Professional help in combating financial fraud

Some folks will say that a financial advisor can help you avoid financial fraud. This is true to the extent that they can advise you on what is and isn’t a fraudulent investment in a very general way. However if you want a stronger control against financial fraud for your business, you need an accountant.

Due diligence reviews

Due diligence (DD) reviews are investigations that accountants carry out on potential investment targets for their clients. These are often businesses that are up for sale. We’ll look at the historical financials, research the industry, examine the prior ownership of the business, and flag any concerns that we have about the business. Most importantly, we can spot any scams in the making.

If the seller of the business is trying to overvalue the business or if they’re passing on a toxic asset, we’ll let you know about it. DDs can be expensive. But you know what is more expensive? Losing your savings on a bad, fraudulent investment.

Transaction analysis

Some accounting firms will perform bookkeeping work for their clients (like our firm). In doing so, we are keeping track of your business’ spending on a daily basis. The minute a transaction looks out of place, we’ll let you know immediately. Most of the time, the transactions are legitimate. However, there have been more than a few occasions where we spotted overpayments made to our client’s suppliers in their transactions. Thanks to our regular checking and quick communication, our client was able to get a refund from their supplier. As you can see, having a pair of trusted eyes on the accounts helps spot discrepancies (like fraud) really quickly!

Stay safe from financial fraud

Scammers are becoming more sophisticated, and every day there is a new crypto-investment scam popping up. The best way to protect yourself is by educating yourself (like you’re doing right now, good job!) If you’re looking to invest on an investment platform, make sure that they are licensed by the Financial Markets Authority if you are in New Zealand. If you live outside of New Zealand, only invest in platforms that have been verified by a governmental financial authority.

Be aware of financial advisors pushing investment products onto you. They may not necessarily be fraudulent, but the advisors are almost certainly getting a cut of the product, and they may be saddling you with a non-optimal investment to increase their financial gain (which is apparently common practice).

Stay safe, dear reader! Invest wisely, and as always:

Stay positive!

Sam is the director of SH Advisory, an online accounting firm for small businesses and startups in NZ. He is also the creator of The Comic Accountant, an internationally-read finance comic blog. With 15 years experience in accounting and finance, he loves sharing quality financial advice with small business owners everywhere. In his spare time, he likes to nerd out over the latest board game launches and great PC gaming deals online. If you need help with your small business and startup, Sam is the person you want to talk to!