How to Prevent Your Business From Becoming a Victim of Fraud

As a small-business owner, you have a lot on your plate. Keeping an eye on everything that’s going on in your office is not possible nor is it a smart use of your time.

When your designing your business structures, you want to make sure you’re hoping for the best from your employees, managers and business partners – but planning for the worst.

The statistics in a recent Entreprenuer Magazine article should send a big jolt of fear into small business owners. According to a 2016 embezzlement survey by HISCOX, a specialty insurance company, 80 percent of embezzlements occurred at small businesses — defined as those with less than 150 employees — and 30 percent of embezzlements involved a loss of more than $500,000.

One major reason scammers target small businesses is because they often lack checks and balances. Typically, a company starts out with employees who are family and friends, and everyone has access to sensitive client information, inventory and sometimes even the checkbook. You may say, that won’t happen at my company — they all love working here — but it does. In fact, 30 percent of the embezzlements occurred because there were no checks and balances at all.

Checks and Balances

Make sure your business has a system of checks and balances to protect your cash, assets, and overall business and to keep operations running smoothly.

The Purpose Of Checks And Balances

So what role should checks and balances play within your organization? Think of them as a series of simple security measures meant to shield you against fraud and other forms of financial malfeasance.

What are the Most Common Forms of Fraud?

  • Check Tampering
  • Skimming
  • Billing Fraud
  • Reimbursement of Expenses
  • Cash Larceny
  • Payroll Fraud
  • Inventory/Merchandise Fraud

Preventing Fraud

From Dun & Bradstreet, there are things you can do to help guard against small business fraud.  Here are seven suggestions for how to prevent the most common forms of fraud.

Check Tampering

Forging, altering, or stealing a check from a company bank account is known as check tampering. The best ways to help protect against this common type of fraud include keeping the company’s checkbooks locked away, regularly taking account of all checks – including voided payments – and reviewing bank statements as they’re delivered. The perpetrator may keep their withdrawals relatively small to try and avoid detection, so it’s important that you have an up-to-date picture of your bank accounts.

Skimming

Skimming occurs when money is taken from a business before it’s recorded. In its simplest form, an employee might pocket cash at the register without ringing up a sale. If this is the case, even balancing your receipts with total cash for the day won’t reveal the theft. Check your inventory on a regular basis. If items are missing and can’t be accounted for on receipts, someone may be skimming.

Billing Fraud

In one scenario, an employee with bad intentions sets up a shell company, then bills his employer for fictitious goods or services. Billing fraud also occurs when an employee submits an invoice to the company for personal purchases. Either way, the business owner has been duped by a disingenuous employee.

This type of fraud is best prevented by requiring your signature and approval for all business expenses, regularly reviewing the company’s list of vendors, and having different people responsible for invoicing and issuing payments. These protections can make it more difficult for someone to sneak in improper bills.

Reimbursement of Expenses

Many companies reimburse employees for legitimate business expenses, such as mileage or hotel bills. This is only fair. Unfortunately, employees who submit fake receipts or try to get funds to cover personal purchases take advantage of the system. You should require receipts for all reimbursements, along with a stated business justification. Something as simple as “Entertaining client A” should suffice.

The company should also require the business owner or finance head to sign-off on these expenses. Keep an eye out for suspicious spending patterns, like unusually large requests from the same employee month after month.

Cash Larceny

Cash larceny typically involves theft of cash from the company after it has been recorded in the books, but before the funds can be deposited. Albeit on a smaller scale, theft from the company’s petty cash pool is also a common occurrence.

The best way to protect against cash larceny is to stamp all incoming checks “for deposit only” with the name of your company. In addition, cash deposits should only be made by the company’s owner to ensure all funds make it to the bank. Balance your cash register receipts at the end of each business day to make sure payments are accounted for.

Payroll Fraud

In this scenario, the employee causes the employer to issue a payment for false compensation claims, such as phony overtime or paychecks for people not on the company payroll.

The size of your business can affect measures you take to prevent payroll fraud. If you only employ a handful of people, you may be able to monitor their hours simply by paying a little extra attention during the day. This isn’t feasible if you employ dozens of staffers. Instead, you can require employee signatures on all time cards and make them come into the office to claim physical checks. That way you should be able to spot people on the payroll who don’t belong. You might also offer direct deposit, which is convenient for employees and ensures paychecks are going to the right people.

Non-Cash Fraud

While cash is king, many criminals are happy to steal merchandise or inventory. Known as non-cash fraud, it can be equally costly to a business.

The most effective way to avoid non-cash fraud is to initiate very tight inventory controls. Tactics can include making periodic inventory counts, installing surveillance cameras, and increasing the presence of physical security.

Taking fraud lightly is exactly what the individuals hacking into your system now are hoping for. Eventually it may come knocking at your door. Hopefully when it does, you’ll be prepared.