5 Steps to Reduce Small Business Fraud

Posted by Amanda Nieweler

on January 30, 2015

Because Fraud Hurts More When You’re a Smaller Business.

You Just Can’t Afford to Lose From Fraud!

Fraud costs small business a median loss of $155,000, according to the ACFE. This is just too much for any small business to handle, and this is a huge threat to the success of that small business. Employee theft and fraud of this magnitude isn’t easily absorbed into small business financials.

The following are 5 steps small business can take to help reduce occupational fraud and abuse.

Step #1: Employee Background Checks
“You rely on the trust of your employees, but just how much trust is too much”. Small business owners and managers wear too many hats resulting in being increasingly distracted from potential misconduct happening right under their noses. Most small businesses don’t implement fraud detection and prevention strategies until it’s too late. Don’t just look at skills, but check references of the people you are going to potentially bring into your company and trust with your financials and accounting.

Step #2: Implement a Written Code of Ethics
First it needs to be short. It’s got to be easily readable and understood. As much as it’s tempting to insert much legalese into a document like this, take a step back and think about exactly who is going to be reading this and why. Is that person going to understand what this document means and why it was created. A Code of Ethics has to be located within the company where employees can easily access it whenever needed. They need to be able to pick it up whenever they want. Most importantly, the document needs to focus on particular ethical challenges that employees will face in that company.

Step #3: Divide Bookkeeping and Check Signing Authority
There needs to be controls and accountability in place. It’s recommended that the person cutting and signing the checks, is not the same person reconciling the accounts. Keep these two functions separated.

Step #4: Deliver Bank Statements Unopened to Management
If a fraudster knows that bank statements have been delivered to management, or clients unopened and not tampered with, chances are they will cease the fraud. If a fraudster has the ability to alter statements in any way, or eliminate questionable financial information before they get reviewed by top management or clients, then chances are that fraud will continue, costing both sides considerable money in the long run.

Step#5: Implement a Reporting Mechanism or Hotline
According to the ACFE, the number one method of fraud detection, and prevention, comes from employee tips. Employees are only going to come forward and report what they’ve seen if they feel protected from retaliation. And this is where a whistleblower program comes into play in business. Businesses that are proactive in their fight against fraud, and incorporate a speak-up culture will find employees coming forward to report on any wrongdoing they see. And this could save a small business a lot of time and money.

Please watch this video shared from The ACFE.

The bottom line is that no matter what you may think, any business, any size, is at risk of occupational fraud and abuse. The important thing to remember is that the best way to protect your business against fraud is to be proactive.

Fraud Checklist