How to Protect Your Small Business From Fraud

Last week, a report came out from the Association of Credit Fraud Examiners (ACFE) which revealed that small businesses are victimized much more often than large businesses, and for much more money. The study found that 30 percent of frauds took place in businesses with 100 employees or fewer, and 53 percent in businesses with fewer than 1,000 employees.The 100-or-fewer group accounted for both the highest percentage of frauds of any group, as well as the highest median dollar amount taken in those frauds — about $150,000, a figure almost double the median amount taken in frauds against the largest businesses analyzed in the study.

Managers and small business owners have a tendency to trust their employees to a higher degree and, because they are doing more, they may not be as detail oriented as they should be,” says Allan Bachman, education manager for the ACFE. “That level of trust is often betrayed. Sometimes employees start taking advantage of the fact that the boss isn't looking and thinks I'm doing a great job.”

Employees have the inside track and understand how a business works, which puts them in unique position to go undetected while perpetuating many different types of schemes.The most common types of insider frauds include theft of assets and accounting frauds, but this type of crime can also include other categories, such as fraudulent worker’s compensation claims.  Other common schemes include buying more goods than a business needs and lining their own pockets, paying invoices to an external third party for fraudulent orders, or creating fictitious vendors. Accounts payable is another area where insiders may be skimming money by taking cash payments and failing to report them or replacing today’s payments with cash paid at later dates.

Small businesses have weaknesses in terms of controls, such as putting the same employee in charge of making deposits and reconciling bank statements. Allowing one employee/department to perform multiple critical functions is inconsistent with preventing fraud. By dividing the responsibility of certain functions, a system of checks and balances is created and this creates an environment where fraud is less likely to occur. Businesses should consider the following examples to establish better checks and balances:

1.      Split accounting functions.

One of the best ways to prevent employee fraud is to split the accounting functions. Make sure that the person who receives incoming payments is not the same person who posts them to your accounting service.

2.  Guard your company’s checks

Always avoid signing blank checks or checks made out to cash. In addition, limit the number of people that are authorized to transfer company funds or to sign the checks.

3. Protect the monthly bank statements and your credit card statements

Make sure that the statements are sent directly to your home or delivered unopened to you and you review them to ensure that there are no inconsistencies.

4. Reconcile your payments

Reconcile your incoming payments with the amounts that get posted in your books and deposited in your bank. This three-way reconciling method prevents potential fraud.  

5. Outsource your payroll.

Perhaps the most effective way to prevent fraud is to outsource your payroll. This is a hassle-free way to deter employees from tampering with your payroll. In addition, this method prevents simple mistakes that are often made by small business accountants and small business owners.

If you are interested in outsourcing your payroll, give us a shout at http://www.peoplelease.com/contact.html

Either way, I’d love to get your thoughts. As always, you can contact me at jdanner@peoplelease.com