How To Fight Small Business Fraud

Posted by Amanda Nieweler

on October 31, 2016

blog_smallbusinessFighting Fraud: protecting the cornerstone of communities everywhere

Many communities depend on small businesses. They drive the local economy. They create jobs.

They can be economic powerhouses.

In British Columbia, small businesses account for one-third of the province’s GDP, outdistancing the performance of the small business sector in other provinces across Canada.

BC’s small businesses make up 98% of all businesses and employ more than one million British Columbians. This is more than half of BC’s total private-sector employment.

The same can be said for many more businesses across North America, and globally.

Smaller businesses tend to work very hard to push the envelope to be even more successful.

This is where internal controls may get shifted to the sidelines, even unintentionally.

And when internal controls get sidelined, this is when fraud and abuse can make an appearance.

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

The following are 5 steps small business can take to help reduce 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 it’s needed. Employees 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.

The best way to protect businesses against fraud is to be proactive.

eBook: 7 Reasons to Implement a Whistleblower Hotline