I’m dealing with my first case of likely fraud in a small business client’s bookkeeping. It apparently stems from the actions of an incompetent or inattentive bookkeeper and an overly trusting business owner. I should not be surprised knowing that $2 out of every $100 passing through the US economy is based on fraud of one type of another. I also know that every small business has similar financial vulnerabilities that usually won’t be discovered until it is too late. Yet the thing that strikes me most in this case is that “fraud” doesn’t look like what I expect. The problem does not fit any of the stereotypes that we tend to have about fraud. The offender doesn’t fit any stereotypical risk profile. The motivations for the actions are not clearly defined. In this case, the fraud mostly strikes me as just sad more so than malicious, criminal or greedy.
The fraud in this case likely involves kiting of payroll taxes. IRS penalty notices actually triggered discovery the problem. I felt grateful for this notice even if IRS involvement meant a hefty fine imposed on the business for the late payment of wage taxes. It is unfortunate that most small business payroll tax fines can be avoided simply by using one of the better automated payroll processing services available today. That’s what we will be doing moving forward.
This case reinforces that the overall cost of fraud to the small business is huge even if the amount of money unaccounted for is small. In this case there are substantial penalties for late payment of taxes to IRS (presumably the bookkeeper delayed the payments to cover up) and the cost to investigate the problem is certainly more than a business would normally spend on its accounting operations. The cost to invesitgate, reconcile and secure accounts is still adding up.
A big part of my work in this case will be adding automated protections in the payroll processing system to keep this type of problem from happening again. Fortunately for me it is easy to adopt a payroll system that is reportedly 17 times less likely to incur these types of problems (according to payroll industry sources) than their current system. This will ultimately make me look like a hero to my small business client.