How to Protect Your Small Business from Fraud

Every business, regardless of size or longevity, is vulnerable to fraud. From corner shops to mega-corporations we are all at risk. According to the most recent report from the Association of Certified Fraud Examiners 82% of all businesses in the U.S will be affected by fraud at some point in their operational lifespan. That’s a fairly staggering statistic, and one that should make all business owners sit up and take notice. 

The same ACFE report sets the cost of fraud to U.S. businesses at roughly $130,000 per incident. That number is slightly misleading, however. When it comes to smaller organizations (those with fewer than 100 employees) the cost per instance of fraud can rise to $200,000. That’s more than enough to cripple, if not outright kill, a small business.

Common Types of Fraud

There are two basic types of fraud with which we are concerned:

• Internal Fraud – This typically takes the form of employee theft or embezzlement. It can either be loss of inventory due to fraudulent accounting procedures or the actual theft of physical or financial assets
• External Fraud – External fraud covers a much broader area. External threats can come from dishonest third party contractors and vendors, most often in the form of overbilling or fraudulent fee schemes. Computer hackers and information thieves pose a growing threat for businesses of all sizes. And, for those in the retail sector, there is always customer fraud to be considered such as the passing of counterfeit currency, check kiting, and false returns.

Fraud in any of its forms can cost a business dearly. However, there are some simple steps that all business owners can take to help protect their organizations from both internal and external incidents of fraudulent activity.

Educate Yourself and Your Staff

The best defense against any form of fraud is education. In order to protect yourself and your business both you and your staff need to better understand the potential threats and how to effectively counteract them. 

Scheduling regular training sessions is the first step. New hires and long-term employees should be instructed on how to spot and respond to potential fraud scenarios. For example, retail sales associates need to be taught how to identify counterfeit cash and credit cards, as well as instructed in the proper protocols for accepting any payments by check. Training sessions should also cover the secure handling of sensitive customer and company information, both online and in real world situations. 

For tips on specific training topics you can consult a local affiliate of the Small Business Administration, or sign up for regular seminars and webinars from security experts and business support groups.

Initiate Regular Employee Background Checks

When it comes to hiring employees small business owners tend to operate on a more casual basis. A general interview and a gut impression is often all it takes to decide whether or not to hire on an applicant. Unfortunately, that can put your business at a much greater risk for employee fraud. 

Comprehensive background checks should be standard operating procedure for all new hires. This is especially important if the employee in question will be handling cash, high-value inventory, or sensitive customer and company data. While no one want to believe their staff members are dishonest, it is vital to take steps to avoid any potentially costly complications in the future.

Keep Some Employee Tasks and Responsibilities Separated

One of the features of almost every small business is the tendency for employees to be responsible for a variety of everyday tasks. While this is can be an effective use of manpower on the sales floor, it’s wiser to divide important administrative tasks between a number of different employees. This is especially true when those tasks are directly involved with the company’s finances. 

For example, if one staff member is solely in charge of approving payments and writing checks the opportunity for fraud is magnified. By splitting those duties between two employees it will be harder for any one member of the team to falsify expenditures and embezzle funds. It’s a matter of having the right checks and balances in place to protect your company’s bottom line.

Maintain Clear and Accurate Records

Organization is one of the best defenses against instances of internal and external fraud. Maintaining clear and accurate records will make it much easier to spot any potential billing or inventory discrepancies. 

For example, keeping highly detailed accounting records allows you to see at a glance what money is coming and in and what money is going out. You can easily check what you are being billed for by your vendors and compare that with product or materials received. 

Inventory control is another area where keeping clear and accurate records pays dividends. Without a reliable record of your current inventory stores you have no real way of knowing if merchandise is finding its way out of the back door.  

Conduct Surprise Audits

Surprise audits are an effective method of uncovering fraudulent activity from both inside and outside of your business. An unexpected audit, by either the business owner or an outside auditing firm, can reveal accounting irregularities that are siphoning money out of the company coffers. Discrepancies in the books may point to internal theft from office staff, or uncover dishonest billing practices from partners and vendors.

Make Vacation Time Mandatory

This is a tip that may seem strange on its face. But one indication of fraudulent activity is an employee who balks at the idea of using up their vacation time. On the surface it looks as though they are simply diligent and committed employees, but they may actually be hesitant to leave on vacation for fear their crimes will be discovered. Requiring employees to use their vacation time can help prevent fraud, as well as provide ample opportunities for business owners to discover something is amiss in their accounting departments.

Boost Your Company’s IT Infrastructure

Computer hacking, data breaches and online fraud are some of the biggest threats to small businesses today. Whatever your business you can be sure you have valuable data stored on your company computers that criminals would be happy to exploit. 

As a protective measure it is important to have up-to-date computer protocols in place for all employees. Passwords should never be shared, and should be updated regularly. Also, to protect sensitive data a commercial grade firewall should be installed on all terminals. Freeware can be suspect, and offers no real recourse for users in the event of a costly data breach. 

Finally, because most small businesses don’t have a dedicated IT team, it is important for management and owners to be wary of tech scams. Remote access tech scams are on the rise, with fraudsters claiming to be from reputable tech support companies. Before granting anyone access to your company’s IT infrastructure confirm that they are indeed from the company they claim to represent.

Be Vigilant

Fraudsters can attack your business from a variety of different directions, but by taking the right proactive measures you can reduce many of risks your company might otherwise be facing. While no one can expect to fully escape the threat of criminal behavior, any steps you take today can only help to prepare your business for a safer and more secure tomorrow.