One of the benefits of a small business is that your employees often feel like family. You work and “play” together and trust is frequently implied. But did you know that small businesses are more likely to be victims of internal fraud? According to a report by the Association of Fraud Examiners, “small businesses lose almost twice as much per scheme to occupational fraud. The median loss for a business with less than 100 employees is $200,000 and 42% of frauds are caused by lack of internal controls.”
There are many reasons small businesses are at risk. Perhaps there are few employees and they perform many functions, close relationships can lead to less scrutiny and few or no formal controls. It’s important that small businesses have steps in place to deter and detect fraud. Here are few suggestions:
Image Source: 2018 ACFE Report to the Nations - Global Study on Occupational Fraud and Abuse
Hire the Right Employees - Even as a small business, having a formal hiring routine can help prevent fraud. Background checks should be performed for all staff who handle cash or manage payments (and bank account information) from customers.
Employees who commit fraud are commonly found to be the most endeared by their coworkers. This person will go out of their way to help and gain trust, often working longer hours and rarely take time off which results in them handling multiple duties and little oversight. In addition, employees who suddenly find their personal lives in challenging financial circumstances may succumb to temptations (see image for other fraud red flags). Requiring vacations can help expose fraud. Often these employees are afraid to leave in fear that someone will finally discover something is wrong.
Create and Maintain Strong Internal Controls - Have checks and balances in place. This includes restricting access to financial account data, petty cash and inventory as well as establishing approvals on expenditures, expense reimbursements, overtime, all check writing functions, and other accounting or payroll functions.
Monitor Cash - Having security cameras monitor activity at registers and storage areas where inventory or cash is kept, especially in a retail setting, is important to deter fraud. People are less likely to take a chance if they are aware that they are being watched.
Create a Fraud Policy - Make sure employees understand that fraud is not tolerated as well as what to do if they suspect it. Have a third-party hotline service for employees to use to report suspicious activity anonymously. Also, make sure employees understand the actions the company will take if it suspects or determines fraud has been committed.
Examine Business Bank Accounts - Online banking makes it easy to view account activity and statements whenever it is convenient. Business management should do this frequently and compare against paper-based statements. Look for missing or out-of-order checks, unknown payment recipients, and checks that were signed over to a third party instead of deposited in a business account. Make staff aware of regular reviews of check activity to help prevent fraud.
Conduct Audits - Businesses should often audit areas that deal in cash, refunds, product returns, inventory management and accounting functions. Surprise audits keep an employee from having the opportunity to change records to hide fraud. Also, surprise audits can uncover duplicate invoice amounts and duplicate invoice numbers, both of which can be red flags for possible wrongdoing.
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.