As a fellow business owner, I know you put a ton of trust in your bookkeeper. After all, they’re the one dealing with the nitty gritty financial details day in and day out. You rely on them to keep accurate records, make sure taxes get paid, and give you reporting that helps you understand what’s really going on with your company’s bottom line. 

But unfortunately, even the most competent bookkeepers can make mistakes or, in some rare cases, end up committing fraud. That’s why it’s so important for us business owners to keep an eye out for any bookkeeping red flags. Spotting issues early is key to minimizing damage.

In this guide, I’ll outline some of the top warning signs I’ve learned to watch out for from my own experience and from talking to other entrepreneurs. I’ll share real stories and examples so you’ll recognize red flags if they pop up in your own financial records. My goal is to help you protect your business by being an informed, vigilant owner.

Let’s dive in and talk about what bookkeeping gone wrong can look like and how to catch it early! Knowledge is power when it comes to safeguarding your company’s finances.

Sloppy Record Keeping

One of the first signs something may be off is messy, disorganized record keeping. I’m not talking about the occasional clerical error or minor mistake here. Those happen in even the most buttoned-up accounting department. 

What you really want to watch for is *consistently sloppy work* – things like important documents filed randomly, transactions recorded weeks late, math errors left uncorrected. It points to the bookkeeper not taking enough care or attention to detail with your finances.

For example, a few years back I noticed our bookkeeper was leaving receipts loose on her desk for months before recording them. I’d find crumpled up bills in odd places around the office. Turns out she was really disorganized and behind on actually entering transactions into our system.

The sloppy record keeping led to all sorts of headaches – delayed financial reports, paperwork getting lost, and inaccuracies because she’d forgotten to record things. 

While it may seem minor, consistent messiness opens the door for bigger issues down the road. It’s easier for fraud to happen when documentation is scattered everywhere. And it leaves you as the owner with an incomplete picture of what’s really going on in your accounts.

If you catch this red flag early, you can work with your bookkeeper to implement better organization systems. Adding controls like required due dates and spot audits of paperwork can help too. If they just can’t get organized, it may be time to move on to someone more diligent. Messy financial records spell trouble.

Disorganized Receipts and Invoices

Piggybacking on that last point, one specific area that should be meticulously organized is your receipts and invoices. These form the paper trail for all your company’s income and expenses. 

But I’ve seen some bookkeepers who treat these crucial documents like meaningless scraps of paper. Receipts get tossed in a shoebox. Invoices disappear into the void, never to be seen again.

When source documents aren’t filed properly, it opens up opportunities for major inaccuracies or fraud.

Like the time an old business partner told me she went months without realizing their bookkeeper was skimming from the company’s cash deposits. Turns out he was pocketing some of the cash each week before it got recorded, knowing there were no receipts to prove otherwise. Ouch.

To avoid issues, your bookkeeper should have an orderly system for collecting, labeling, and storing documentation. Digital scans help too. You want a clear paper trail that can be audited if needed.

Watch out for casual attitudes about tracking receipts and invoices. It’s often the first sign of trouble brewing!

Lack of Internal Controls 

Now this next one is a bit more inside baseball if you’re not familiar with accounting practices. But essentially, “internal controls” refers to checks and balances put in place to prevent fraud or errors. 

For example, requiring two signatures on large checks, having a manager review employee expense reports, separation of who records transactions vs. who handles the bank account reconciliations. You get the idea.

Well, here’s a shocker…bookkeepers who want to misuse funds HATE internal controls. And some will conveniently “forget” to implement them even when you’ve asked. Other times, they insist certain controls aren’t needed (red flag!).

One client told me their bookkeeper fought them tooth and nail on doing monthly account reconciliations to compare their internal books to the bank statements. Turns out said bookkeeper had been skimming money, so they didn’t want evidence catching up to their fraud.

Moral of the story: Insist on basic internal controls like multi-person approval of large transactions. Require periodic reviews by a second person to double check work. And make sure account access and permissions align to employee’s roles. 

Yes, controls add extra steps. But a little effort up front is infinitely better than dealing with theft or errors down the road!

Excessive Adjustments and Write-offs

Now, before we go demonizing all adjustments and write-offs, let me be clear – legitimate ones are a normal part of bookkeeping. 

As your bookkeeper reviews the books and fixes errors, they’ll need to record adjusting entries to move money between accounts. And write-offs for things like inventory shrinkage or bad debts are expected too.

*However…*when you see frequent, heavy adjustments lowering your profits without clear explanation, it could point to a problem. Especially if it’s adjustments wiping away your own personal income or distributions. 

I’ve seen crafty bookkeepers post big retroactive “consulting fee” adjustments to hide owners draws they don’t want documented. Or write-off receivables they never even attempted to collect on, just to reduce taxable revenue. 

The bottom line – dig deeper anytime you spot lots of adjustments, especially ones that don’t feel quite right or match your understanding of what’s going on with your business. Requiring detailed documentation and second approvals around adjusting entries can help reduce fraud.

Bank and Credit Card Statements Not Reconciled 

Now, I’ll admit this one sounds a bit boring. But reconciling accounts is a super important internal control. Essentially, your bookkeeper matches up your bank/CC statements to your internal company records to be sure transactions align on both sides. 

If the reconciliation reports start getting spotty or delayed, pay attention. I’ve seen cases where an employee was siphoning company funds but it went undetected for months since no one was comparing statements.

For example, a bookkeeper might write a check out to themselves but not record it on your books. If your owner reports come from your internal system only, you’d never know money left your account! Reconciling catches issues like that when the bank balance doesn’t match your records.

Insist on getting copies of the reconciliation reports regularly – or better yet, have an outsider double-check them. Don’t let an unscrupulous bookkeeper hide sloppy work or fraud by skipping this crucial step!

Math Errors

Alright, it’s not surprising for the occasional math mistake to slip through. We’re all human after all! But if you start noticing frequent large errors, that indicates a lack of care or ineptitude you don’t want in your financial staff. 

For example, a new client asked me to review their books and I found several months of drastically overstated expenses due to simple spreadsheet formula errors. It took hours to audit and correct once the mistakes compounded over time!

Sloppy math errors distort your financial reporting and could even lead to incorrect tax filings and other headaches. Immediate correction is key, but also assess if broader training or oversight is needed. Depending on severity, inaccurate books may warrant moving on from that bookkeeper.

Double checking totals and spot testing reports can help catch math problems before they spiral. Don’t let sloppiness slide – inaccurate books undermine your entire financial picture.

Delayed Reporting

As a business owner, you likely rely on your bookkeeper to deliver timely financial statements, cash flow reports, and other updates. Receiving those regularly is crucial for making sound decisions.

So consistent delays or excuses on reporting could point to a problem area. Sometimes it’s sheer disorganization – they’re scrambling to close the books and can’t pull reports together reliably each month. 

But other times, a shady bookkeeper intentionally drags feet on reporting to avoid scrutiny. I’ve seen fraudsters delay delivering owner payout calculations and other sensitive reports until right before tax time when they know things are too frantic to review closely. Sneaky!

Set clear expectations up front for regular reporting deadlines and require proactive communication if delays happen. You provide vital financial resources – don’t tolerate radio silence in return!

Unusual Accounting Methods 

The basic accounting equation holds that every transaction has equal and offsetting effects somewhere in the books. But crafty bookkeepers can get creative with how they record things in order to hide or shift money around.

For example, a client’s bookkeeper was conspiring with their partner to overpay themselves from the company. They hid the excess owners draws as dubious “shareholder loans.” Shifty! 

While GAAP rules do allow for some judgment, heavy use of questionable approaches like delayed write-offs or depreciation bending often signals trouble.

Anytime you spot odd accounting treatments, request detailed explanations and documentation. If it feels fishy, bring in a neutral outside accountant to audit and suggest proper corrections.

Lack of Communication

On a less nefarious note, a bookkeeper who seems to avoid communicating with you proactively can still spell trouble. You need them to function as a liaison translating the finances into layman’s terms and keeping you posted on issues.

For example, one client’s bookkeeper would only speak when spoken to and provided bare minimum terse responses. So the client was shocked when a huge past due tax bill surfaced that the bookkeeper had never warned them about.

Make sure you have open lines of dialogue and that your bookkeeper shares obligations and abnormalities without you having to dig it out of them. Consistent evasion is troubling – they should welcome keeping you informed!

High Employee Turnover 

Sometimes heavy churn in the bookkeeping department signals an underlying issue. While some turnover is natural, a spot that’s a revolving door with people quitting or being fired quickly can mean a few things. 

Either the employer or working conditions are awful. Or unethical conduct and fraud is causing the turnover once misdeeds surface.

I know one company who has filled their bookkeeping post four times in two years because they unreasonably expect CPAs working for a fraction of market pay. And another whose bookkeeper left after three months because she realized shady business practices were the norm.

Take time to assess root causes if you see rapid bookkeeper turnover. Are you expecting too much for too little pay? Or are questionable financial practices eroding trust? Identifying solutions will minimize disruption to a critical role.

Excessive Owner Perks

Last but not least, keep an eye out for bookkeepers facilitating excessive withdrawals or perks that enrich owners at the company’s expense. A little side money is one thing, but systematic abuse crosses a line.

For example, one restaurant client’s bookkeeper conspired to let the owner record hundreds of dollars of personal grocery bills each week as business expenses. And a retailer’s bookkeeper looked the other way as the owner took multiple lavish vacations each quarter under dubious pretexts. 

Reasonable owner pay is fine, but clear separating of personal versus business funds is a must. Require documentation and impose oversight like owner pre-approval for large withdrawals.

A bookkeeper colluding on misuse of funds is a huge red flag necessitating change. Don’t drain your own company’s resources through unchecked side deals.

Conclusion

I hope walking through these common bookkeeping red flags gives you added insight into protecting your business. While most bookkeepers are diligent professionals, it never hurts us owners to keep our eyes open.

Stay engaged with your own financial records and processes. Ask questions, dig into unclear situations, and request added controls where needed.

With a little extra vigilance – and some proactive adjustments when you spot discrepancies – you can identify and resolve bookkeeping issues promptly. That oversight is what keeps the dollars and cents working hard for your company’s success!