As a business owner, you rely on your bookkeeper to keep accurate financial records. But what if they’re making mistakes or even behaving fraudulently? Unfortunately, many owners don’t realize there’s a problem until the business is already suffering. 

Don’t let that happen to you! This article will explore 15 common bookkeeping red flags so you can spot issues early and take action. I’ll use real-world examples to illustrate what these warning signs look like day-to-day. Recognizing these red flags right away gives you a chance to correct problems before lasting damage is done. Let’s dive in!

Sloppy Record Keeping

One of the biggest red flags is disorganized, sloppy record keeping. Recently, a client of mine had a bookkeeper who never kept careful track of invoices or filed them properly. When it came time to do taxes, key documents were missing. It was a mad scramble to reconstruct records, resulting in late filing and penalties. 

Watch out for things like:

– Misplaced invoices and receipts

– Data entry errors 

– Lots of corrections without explanation

– Handwritten records that should be digital

– Unclear audit trails

Messy records make it tough to assess the business’s real financial health. It also opens the door for innocent mistakes or deliberate fraud to go undetected. Demand organized bookkeeping from the start.

Disorganized Financial Documents  

Similarly, the bookkeeper should keep financial documents organized neatly by date and type. For instance, bank statements should be filed sequentially in monthly folders. The same goes for invoices, receipts, contracts, and other materials. 

I once saw a bookkeeper who just dumped papers into random piles and boxes. When asked for a specific document, it took ages to dig through the mess to find it. Make sure your records are orderly and easy to locate. You shouldn’t have to excavate!

Always Late Submitting Reports 

Does your bookkeeper consistently miss deadlines for financial reports? Do they need frequent reminders and pushing to get standard monthly reports done?

While occasional delays can happen, a pattern of lateness likely indicates problems. The books may not be up-to-date. Or your bookkeeper may lack the skills for timely recording and reporting.

You need financial data on time to make sound business decisions. And chronic reporting delays are a clear warning sign you may need to change bookkeeping staff.

Lack of Internal Controls

A key part of sound financial practices is having internal controls in place. This includes things like requiring dual signatures on large expense checks.

Other standard controls include:

– Keeping the check signing function separate from bookkeeping activities.

– Having a business owner review and approve bank reconciliations.

– Restricting accounting software access to authorized users only.

If basic controls like these are missing, it enables mistakes or fraud to occur more easily. Insist on sound internal financial protocols to limit risk.

Unexplained Changes in Financial Statements

As the business owner, you should receive and review the company’s financial statements each month. The reports should follow consistent formatting and show expected trends.

Watch for any unusual changes, such as:

– Sudden drops in profits or cash balances.

– Spikes in expenses.

– Shifts in typical ratios like gross margin.

– Reclassifications or consolidations in accounts.

Ask for an explanation from your bookkeeper for any substantial changes. Getting logical reasons helps confirm their accuracy.

Poor Communication 

A bookkeeper should maintain ongoing, open communication with business owners and management. This includes providing status updates on tasks, answering questions promptly, and explaining financial reports.

Watch for delayed or unclear responses from the bookkeeper. If they seem to avoid communicating, it may indicate disorganization or lack of knowledge. Insist on improvement to ensure you stay informed on the company’s finances.

Defensive or Evasive When Questioned 

Honest bookkeepers welcome inquires and feedback about their work. But sometimes, fraudsters show defensiveness or evasiveness when questioned.

If your bookkeeper displays reluctance, irritation, or secretiveness when asked for explanations, it may be a red flag of larger issues. They could be hiding sloppy work or wrongdoing.

Refusal to Provide Supporting Documentation

As the business owner, you have the right to see documentation that backs up the bookkeeping records. This includes things like bank statements, canceled checks, receipts, and invoices.

Responsible bookkeepers are glad to provide this verification because it proves the accuracy of their work. If your bookkeeper refuses to supply supporting materials, they may be hiding errors, poor organization, or fraud.

Living Beyond Means

In rare cases, a dishonest bookkeeper may abuse their position to embezzle or skim money from the company. Warning signs of potential fraud include living far beyond their means. 

For example, they may drive expensive cars, wear pricy jewelry, have lavish vacations, or own a home they likely can’t afford on their salary. Review personnel files to check for signs of sudden increased wealth.

Personal and Business Expenses Mixing

Reputable bookkeepers keep personal and business expenses completely separate. But sometimes, bookkeepers with bad motives may charge personal items on company credit cards or accounts. Or they may write checks from the business account to “cash” for non-business purposes.

Review expense documentation carefully for any suspicious charges. Question unusual transactions to ensure proper use of company funds.

Unusual Transactions

Savvy business owners make a point to review certain transactions regularly. Look for any that seem suspicious or out of the ordinary, like:

– Vendor payments substantially higher than normal amounts.

– Large payments to unfamiliar vendors. 

– Sudden changes in typical payment terms.

– Bank transfers to personal accounts.

Follow up on unusual financial transactions or patterns that don’t make sense. Make sure legitimate reasons support them.

Unable to Contact at Critical Times

Bookkeepers should be accessible during business hours, especially at month-end and tax time. But one red flag is a bookkeeper who seems impossible to reach during critical financial periods. 

They may claim sickness, car trouble, personal issues, or other vague excuses. This unavailability may signal disorganization or attempts to delay exposing errors. Make sure your bookkeeper shows up when needed most.

Lack of Experience/Expertise

Bookkeeping requires specialized knowledge and experience with standard accounting practices. Warning signs of inadequate expertise include:  

– Not using double-entry accrual accounting.

– Failure to perform account reconciliation.

– Confusion handling common transactions.

– Mistakes calculating depreciation or inventory costs.

If your bookkeeper lacks proper qualifications, it can lead to costly errors and compliance issues. Require demonstrated bookkeeping proficiency.

Not Following Regulations

All businesses must comply with financial regulations that apply to their industry. A bookkeeper who ignores rules and requirements can leave the company at serious legal risk.

Their work should reflect sound practices like:

– Classifying workers properly as employees or contractors.  

– Withholding and remitting payroll taxes on time.

– Issuing timely, accurate 1099s to contractors.

– Adhering to rules for expense deductions and capitalization.

Don’t cut corners that could lead to tax penalties or legal problems down the road.

Using Outdated Systems and Processes  

Bookkeeping improves continuously as new technologies and best practices emerge. But some bookkeepers stick with old methods rather than adopting improvements.

Red flags include relying on paper records rather than digital systems. Or using outdated, inefficient spreadsheets rather than integrated accounting software.

Lagging behind modern standards causes unnecessary time and expense. Make sure your bookkeeper uses current tools and approaches.

Conclusion

Identifying bookkeeping red flags early allows you to take steps to improve practices before real damage occurs. While no bookkeeping system is perfect, watching for these common warning signs helps minimize risk.

Address problems promptly by providing additional training and oversight. Or in severe cases, consider replacing subpar bookkeepers to ensure accurate financial tracking.

Stay engaged with your company’s financial activities. This allows you to spot discrepancies and keep your business on sound financial footing for growth and success.