Preventing Small-Business Fraud

Small businesses are more likely to become the victims of fraud than larger businesses.

Small businesses are the most vulnerable to occupational fraud and abuse, according to the Association for Certified Fraud Examiners (ACFE). In its 2020 Report to the Nation on Occupational Fraud and Abuse, ACFE cites that the smallest organizations, 100 employees or less, suffered higher median losses than did the largest organizations (10,000 employees or more). While the largest companies suffered losses of $140,000 on average, small businesses’ losses averaged $150,000, based on its survey.

Considering the potential losses and how much more of an impact $150,000 is to a smaller business than a larger business, it befits small-business owners to make the prevention of fraud a priority. Though no business owner wants to feel it employs unscrupulous people, sometimes temptation or personal financial pressures can push even the hardest working, most trusted employee into perpetrating fraud.

Here’s how you can prevent fraudulent activity in your workplace:

Hire the right employees. Small companies seldom bother doing background checks on new employees, which means they’re potentially inviting hackers, predators and even convicted felons into the organization. While every business strives to hire honest employees, having a formal hiring routine, even at a small business, can help prevent fraud. Don’t rely entirely on references and work history. Conduct background checks for people handling inventory and money. Check past employment, criminal convictions, education and certifications. Conduct drug screening, since employees will often steal from a business to support an addiction. However, remember to always get the written consent of candidates before drug testing, since many federal and state laws govern the gathering of such information. Once the employee is being considered for hire, review their social networks for anything that could be damaging to your business’s reputation, especially any animosity against their former employer.

Maintain strong internal controls. Small businesses need to create and maintain internal controls that can prevent or detect fraud. This includes restricting access to financial account data, inventory access, establishing multi-person sign-off on expense reimbursements, overtime, all check writing functions, other accounting or payroll functions, and performing an overview of audit logs to ensure the integrity of the books.

Safeguard your entry and computer systems. Be sure to limit access to specific areas of the business for certain employees. Additionally, set up strict protocols for creating and updating passwords into computer systems.

Conduct surprise audits regularly. Occasional non-scheduled audits can also help detect fraud. Businesses should routinely audit areas that deal in cash, refunds, product returns, inventory management, and accounting functions. Include surprise audits as part of your pro-active fraud policy. All too many notable fraudsters knew that the auditors were coming, allowing them time to alter, destroy, or misplace evidence of their wrongdoing. Make it a surprise to catch an employee off guard.

Establish an anonymous reporting system. Tips from employees is the number one method for catching fraud. Because most employees are reluctant to report suspicious activity, there needs to be an avenue for them to report fraud anonymously. Establishing an anonymous reporting system or process can also set their mind at ease about letting their bosses know about a fellow coworker.

Require time away. Employees that don’t take vacations should raise a red flag. An employee who comes in early and stays late or never takes a vacation has the perfect opportunity to conceal their wrongdoing. Requiring employees to take time off can aid in the prevention of some frauds.

Train employees to detect and prevent fraud. Employees in fraud-prone areas of the business should know the warning signs of fraud, prevention skills and how to report suspicious behavior or actions by coworkers and customers. Provide periodic training to help employees understand fraud and what to do in the event of fraud.

Implement policies to protect your reputation. Institute an employee policy that outlines expected employee behavior anytime they represent the company, including any mentions on their social networks.

Set the tone at the top and have policies, including a fraud policy. Have a written ethics and fraud policy. Companies frequently have an ethics policy, which sets forth in detail what is expected in the ethical climate of the company. A fraud policy spells out actions that constitute fraud and how those actions will be punished. Simply inform employees during employee orientation, training programs, memorandums, or other communication that fraud is not tolerated and let employees know what to do if they suspect fraud.

Increasing the perception of detection is one of the best fraud deterrents. Make sure employees are aware that dishonest acts will be punished. The opportunity to commit fraud is easier to rationalize when employees believe their wrongful acts will go undetected and unprosecuted. Perception of detection is a very powerful deterrent. Essentially, let it be known to employees that you are watching for it.

Purchase Insurance. While we have discussed many items to help deter fraud, no measure is foolproof. Consider getting an insurance policy that specifically protects against various frauds.

The prevention of fraud starts with a conversation. Encourage leaders and advisors of your business to start these today!