How to Deter Fraud as Small Business Owner

Small and medium enterprises are more exposed to fraud than larger businesses, and the effects can be damaging. The fraud types your businesses must be conscious of generally fall into three classifications: Theft, financial statement fraud, and asset misuse. Theft, or misappropriation of assets, makes up the majority of fraudulent acts, according to the Association of Certified Fraud Examiners.

These thefts, either by direct stealing of cash, claiming false expenses or taking other property, are usually done by workers. This is a tough fact for many small business proprietors, who often consider their subordinates as friends and even members of an extended work family. The other primary types of fraud involve financial statement reporting and general corruption, such as bribes or other schemes in which the employee benefits personally by breaking their trust to the employer.

Why small and mid-sized businesses face a higher risk from fraud is due to many factors, including workers performing many functions across the company, the close relationships between staff that leads to less scrutiny, few regular oversight procedures, limited expertise on financial matters, and the large impact on cash flow that even a comparably small fraud event can have on the fiscal health of the business.

Consequently, it’s important that small businesses take steps to prevent fraud and to discover it as soon as feasible. If you can inbibe and cultivate the following into your business culture, you are sure of putting fraud at bay!

*Separate Accounting Functions:

Because of their business size, most small businesses have one person that handles bookkeeping duties such as client receivables, processing client payments, paying invoices, managing petty cash and posting these functions in the accounting system. This makes it easy for cases of fraud to go unnoticed. Businesses should have at least two persons managing these functions interchangeably, keep the handling of cash and accounting functions completely separate, or have the functions performed through a virtual CFO relationship with an accounting firm like JSC Global Accounting Services.

*Understand Your Workforce:

While every business strives to hire honest employees, having a formal hiring routine, even as a small business, can help prevent fraud. Background checks should be performed for all staff handling cash or managing payments (and bank account information) from customers. As the employee’s level of interaction with finances increases, so too should attention be paid to their past, and present, jobs.

Although it may look counterintuitive, employees committing fraud are often discovered to be the most endeared by their coworkers, because the person will go out of their way to assist and earn trust, oftentimes working long hours and seldom taking time off. This results in them working several jobs, and with less oversight.

Moreover, employees facing unforeseen financial challenges in their personal lives may yield to temptations. Encouraging staff to take their vacations can further expose fraud if it is happening, and also can help ease wearied honest employees.

*Ensure Internal Controls or Checks:

Also, small businesses need to create and maintain internal controls that can deter or detect fraud promptly. This includes regulating access to financial account data, record access, establishing multi-person sign-off on expense payments, overtime, all check writing functions, and other accounting or payroll functions, and performing an overview of audit logs to secure the integrity of the records.

*Inspect thoroughly your Business Bank Accounts:

With online banking options, it’s easy to see account activity and statements whenever is suitable, and business administrators should do this often to make sure that paper-based statements in the office have not been manipulated. The key items to look for are missing or out-of-order checks, strange payment beneficiaries, and checks that were signed over to a third party instead of deposited in a business account. Just letting staff know that reviewing check activity is part of the accounting review process can help curb fraud.

*Audit your Business Records Frequently:

Businesses should routinely audit areas that deal in cash, refunds, product returns, inventory management, and accounting functions. Additionally, random non-scheduled audits can also help expose fraud in high risk, crucial business operations. The ACFE offers a Fraud Prevention Check-Up to help businesses identify the risk of fraud and develop controls to prevent losses: http://www.acfe.com/fraud-prevention-checkup.aspx.

*You must Educate and Train Workers To Deter Fraud:

Employees in fraud-prone sections of the business should recognize the warning signs of fraud, prevention skills and how to report questionable behavior or activities by coworkers and clients or customers. Establishing an anonymous reporting system or process can also set their mind at ease about letting their bosses know about a fellow coworker. The management, including owners of small businesses, should create a code of ethics that makes it clear that unscrupulous conducts will not be allowed.

*Guard your Credit Card Information:

Credit card fraud is in the headlines so frequently that some people may have become numbed by the news. But businesses of all sizes, even the smallest home-based endeavor, should start by steadfastly separating business and own accounts. The mixture of business funds with personal finances is not only prone to very costly errors but can expose the individual to lost funds on both sides if the credit card information is breached. Separating accounts further makes tracking business expenses much easier. Firms should likewise be wary of whom they give their credit card data to and should use secured, online bill payment services when possible, reducing the potential for check fraud or theft.

*Understand Your Business, Partners:

Before going into a business alliance with another business, or person, it demands some level of trust – such as sending them an invoice after they’ve received a product or service – make sure you at least know the basics. Knowing their physical address is a major restraint to fraud, as is having alternate contact methods and persons, and references. Even a simple web search of a company should provide enough information as to whether they are truly in business or not, and for how long. Additional resources that can provide background information may include your local, state or provincial government commerce department and private business investigation bureaux.

*Check Into Every Reported Case:

If you’ve set up fraud prevention steps and reporting procedures, but you don’t follow through by looking into reports or suspicions, then you’re crushing your own security. In order to strengthen the business’ policy of no tolerance for unethical behavior, each case should be examined, despite the size.

*Get Professional help :

If a business has executed fraud prevention measures and the numbers still aren’t adding up, or when there are larger legal implications, it may be reasonable to hire a professional accountant to come in and perform a more extensive review and audit of the business’ books and control processes. CPAs and Certified Fraud Examiners can provide extensive help in fraud detection and pursuance, if imminent.

In conclusion, according to a recent KPMG survey, the most common perpetrators of fraud are “business insiders”, with 36 per cent of fraud attributable to business management*. Small Business Owners must safeguard against the threat of these inside jobs with proper controls to catch fraud before it happens. Or risk loosing their ventures.