Small businesses are often more susceptible to fraud than large companies and majority of small business owners do not even think employees could be engaging in illegal activity before it is too late.
Fraud is more prevalent in small businesses due to increased trust, limited controls, failure to delegate, and unclear job responsibilities.
The most common types of fraud that affects small businesses include check tampering, inventory fraud, and commercial bribery. An internal employee commonly conducts fraud. Generally, the longer someone has worked for a business and the higher their rank, the more likely they are to commit larger frauds before getting caught.
Considering the high amount of potential losses, small businesses owners should make fraud prevention a priority.
- Be aware that it could happen to you. Small business fraud is widespread and it is important to understand that it can happen to your company.
- Before hiring any employees, conduct a thorough background check. Check employment history, references, education, and criminal convictions. Most individuals who engage in fraud activity have never been charged or convicted of a previous fraud-related offense, but requiring a background check from the beginning can prevent potential fraudsters.
- Gain awareness of common fraud red flags. There are a variety of signs of fraud and small business owners must be able to identify the warnings and look out for them. They do not always mean fraud is happening, but they do mean that close monitoring may be necessary.
- Review and improve internal controls and implement other anti-fraud tactics. There are various effective methods in reducing opportunities for fraud and providing prevention. Small business owners should gain an understanding of the most common controls and other actions for their certain type of business.
- Create a fraud policy. In simple terms, inform employees during their orientation, training programs, and other similar activities that fraud is not tolerated and outline what should be done if an employee suspects fraud. Also, make sure to let employees know of the actions the business will take if fraud is suspected or determined.
- Ensure expenditures are approved and monitor cash situations. Make sure you as the owner or a manager approves all expenses to check validity.
- Invest in fidelity coverage. Business insurance is a key asset that protects business in cases of losses due to forgery, burglary, embezzlement, and other damaging activity.
- Take personal responsibility for constant observation. Small business owners themselves must accept the responsibility for anti-fraud strategies and monitoring. Trusting an employee with this task could prove to be a detrimental if the employee is the one committing fraud.
- Conduct occasional audits. Periodically auditing departments or the company as a whole can help prevent money laundering because it catches employees off guard.
- Install security equipment in loading zones, storage rooms, and other areas to prevent property theft.
Keep detailed records of the purchasing of supplies and needed equipment. For example, if a certain employee is in charge of ordering office supplies such as printer ink and toner, require them to use one source or website such as inkpal.com so you can track ordering records and ensure the amount of money for supplies is accounted for.
- Encourage Anonymous Reporting. In small businesses where employees commonly work closely together, individuals may worry about the results of reporting fraudulent behavior so it is important to clearly state that it can be done in an anonymous manner. Third party intermediaries can be helpful in determining if accusations are valid. An example of a useful anonymous reporting system is a third-party hotline service.