Part of the job of any bookkeeper or tax preparer is to keep an eye out for fraud. Ignoring warning signs in a client’s finances could leave you on the hook for charges related to tax fraud, which could lead to fines, loss of your license to practice, and even (in extreme cases) jail time.
But what exactly counts as a “warning sign?” Some are pretty obvious and some are more subtle. Here are 17 signs to watch out for that hint a client is hiding something from you.
1. No budget: When a client isn’t working within defined spend limits or doesn’t have revenue goals from various sources, there may be something more going on (e.g., a source of funds they’re hiding from you to avoid paying taxes on). If a client doesn’t present you with a budget upfront, ask to see one. If they’re cagey about getting it to you, consider yourself warned.
2. Changing transactions from months past: This isn’t just inconvenient for you, it could indicate that a client is trying to slip in questionable transactions or revenue where it won’t be as closely scrutinized.
3. Maintaining two sets of books / records: Why add complexity to a system that’s already complex enough? Usually, the reason is to have an “official” version of events and one that actually tracks what happened. Obviously, this is fraudulent.
4. Multiple bank accounts: It’s much easier to hide questionable transactions when money is divided between multiple banks. If a client has multiple accounts as a holdover from an earlier phase, recommend merging if at all possible. If they resist, be suspicious.
5. Frequent use of cash or cashier’s checks: These days, cash rarely makes sense. If a client is reporting a lot of cash transactions, ask for more documentation.
6. Cashing business checks: Again, cash is an odd (and inconvenient) choice, especially for checks made to the business.
7. Photocopies of invoices & bills, rather than originals: It’s much easier to alter copies than originals. Maybe even more important, there’s rarely a good reason (besides fraud) to use anything but originals.
8. Double bill payment: This sometimes happens by accident, but if it crops up over and over, dig deeper. In some cases, it’s the first clue that a client is using business funds improperly.
9. Missing checks or other documents: A few mistakes are normal. A client who’s consistently missing documentation may be hiding something. It can be tempting to sympathize with your client’s excuses for not having paperwork, but do your best to insist on evidence of transactions – or, again, consider charging additional fees for behaviors that cost you lots of additional time to disincentivize them.
10. Missing numbers between checks: Big red flag here: what were the missing checks used for? Be persistent in tracking these down – not doing so could easily be construed as failing at basic due diligence, which will look bad for you in the event of an investigation.
11. Employee complaints / bad morale: This one is less concrete but no less important. If you’re in the kitchen getting coffee at a client’s office, for example, and overhear a conversation that suggests either fraudulent activity or generally bad morale, take it into consideration. In conjunction with other warning signs, it can signify that business practices are less than above-board.
12. Excess purchases: Six-thousand dollars on printer paper per month at a small office? Seems like a lot, right? Don’t ignore things like this that aren’t illegal but seem “off:” purchasing too much of something and returning the excess is one form of expense fraud that your clients or their employees might be committing.
13. Inventory shrinkage: A little is normal; if shrinkage is a major line item, there may be something else going on.
14. Voided receipts / returned checks: Again, these happen from time to time for legitimate reasons, but if they become a regular occurrence they could signify that your client is trying to hide something.
15. Change in invoice volume: A sudden increase in invoices could just be really good news for business. But it could also signify that a client is attempting to legitimize money from somewhere else. If you notice this, bring it up in conversation. Get as many details as you can – and be on the lookout for classic “tells” that your client is hiding something (or even outright lying).
16. Expense receipts just under approval amounts: Any expense receipt just shy of the approval limit should be double-checked. If there are a lot of these, be even more thorough: it could be business expense fraud.
17. Intuition: If you have the feeling that something isn’t quite right, trust your instincts. Follow up on any of the above red flags, ask your client questions, and be ready to deal with what you find.
What to Do When You Spot Red Flags
When something’s really wrong, there are usually multiple red flags that signal you need to take action. Whenever you spot something abnormal, listen to your Spidey sense. Do your due diligence. Ask tough questions and double-check your work. It’s sometimes easier in the short term to ignore red flags, but in the long term doing nothing will almost always cost you more than taking action.
If you’re unable to resolve a suspected problem, don’t be afraid to end the relationship. The short-term revenue loss will cost far less than the long-term stress and possibility for legal trouble.