5 Tips for Small Business Fraud Prevention

5 Tips for Small Business Fraud Prevention

If you were presented with the opportunity to instantly improve your business revenue by 5 percent each year without increasing your sales volume or staff, you’d take it—right? Unfortunately, most business owners lose an average of about 5 percent of their annual revenue as a direct result of employee fraud, theft, and financial abuse. Since small businesses lose nearly twice as much per scheme, small business fraud prevention can be the key to profitability.

Stopping these fraud schemes in their tracks can not only boost your bottom line but it can also improve workplace morale. Read on to learn more about the most common types of small business fraud, as well as five concrete steps you can take to protect your livelihood.

Problem: Check Tampering

Solution: Extra Controls and Oversight

The advent of electronic banking has made it tougher for less-sophisticated fraudsters to steal company funds undetected. However, for the many businesses that maintain a physical checkbook, check tampering continues to be a problem. When purchase and inventory records aren’t verified, employees may be able to cash checks for more than the amount of a certain purchase (thereby pocketing the extra) or even steal blank checks entirely.

The most immediate solution to these common issues is a company-wide requirement that two or more employees sign off on all purchases. This ensures that transactions are verified before they occur, eliminating the need to try to untangle complicated invoicing arrangements after the fact. Business owners should also keep careful tabs on all checks, noting when there’s a gap between check numbers that could indicate that a checkbook has gone missing.

Problem: Padded Business Expenses

Solution: Clear Company Policies

One type of fraud that is often rationalized by otherwise ethical employees is the padding of travel or other reimbursable expenses. While government workers are often required to book their travel through certain price-controlled websites and submit itemized lists for reimbursement, private companies (particularly smaller ones) often require much less particularity in their expense documentation. This can encourage employees to round up their travel expenses, sometimes by hundreds of dollars, with the knowledge that they’re unlikely to be asked to provide documentation.

Including in your employee handbook some clear guidance and documentation requirements for reimbursable expenses can put an end to this practice. By ensuring that these guidelines are clearly communicated to your employees, you’ll quickly set a new status quo.

Problem: Fraudulent Billing Schemes

Solution: Cross-Training

For many small businesses, it often makes sense for each employee to have a distinct role. But giving one—and only one—employee the power to enroll new vendors or approve payments can increase the risk of billing fraud. By signing up “dummy” vendors (or even legitimate vendors in which the employee has a financial interest) and approving payment for services not rendered, an employee can divert quite a bit of money while evading detection.

By cross-training your employees to handle multiple roles, you’ll help shine a light on this type of fraud and reduce the risk of one employee running a personal enrichment program. Additionally, employees

with access to company financials should be encouraged to use all the annual vacation leave offered. If an employee seems reluctant to leave the job behind (even for a long weekend) or refuses to train other employees in parts of their job, this can indicate an attempt to conceal some type of financial malfeasance.

Problem: Time Theft

Solution: Productivity Goals

When employees don’t have enough to do (or just aren’t motivated to do it), they may work on personal projects or perform moonlighting assignments while on the job. Setting productivity goals can be a good way to combat this, as can performing a comprehensive, top-to-bottom job duties review for all employees. If it’s been a while since you’ve checked in on each employee’s workload or if you’re not quite sure what some of your employees actually do all day, there’s never been a better time to get started.

Problem: Lack of Trust

Solution: Standardized Hiring Practices and Background Checks

As a business owner, you want to—and should—be able to trust your employees. One way to build and maintain a trustworthy workforce is to standardize your hiring practices and make passing a criminal background and credit check a condition of employment.

Many individuals who are accused of embezzlement have a long history of misdemeanor charges for petty theft or bounced checks that should have been a red flag to an employer. Others’ credit histories may display clear evidence of delinquent payments, potentially making them ill-suited for a job where they have easy access to someone else’s money.

Engaging Small Business Fraud Prevention

Fraud is a part of our world, but it doesn’t have to be a part of your business. At Klein Hall, our Certified Fraud Examiners work diligently to detect, deter, and prevent fraudulent activity. If you’re ready to protect your small business with fraud prevention, investigation, and recovery services, give us a call at (630) 898-5578 or fill out a contact form today.