Fraud is in the news so often that you might be numb to its threat. But, fraud can be costly and devastating for businesses of any size.
Regardless of the size of your business, there are things you can do to prevent fraud. Start by separating personal and business accounts.
Know Your Vendors
Fraud perpetrated by vendors can be a significant threat to your business’s financial health and reputation. This is especially true for small businesses since they are often less likely to have in-place internal control strategies than large, enterprise-level companies.
Fraudsters may try to take advantage of your accounts payable or procurement departments by impersonating a vendor and submitting fraudulent invoice payments. They might also create duplicate invoices for delivered services and divert the payment to their account.
To prevent these types of fraudulent activity, it’s important to know your vendors and understand their business. This will help you spot red flags like fake vendor fraud, overbilling, or a P.O. box address that doesn’t match your records.
Know Your Employees
Employee fraud is a big problem in small businesses. Employees may commit various fraudulent activities, including theft, embezzlement, kickbacks and payroll fraud. Employees are usually the first to notice suspicious activities and can play a major role in helping to prevent fraud.
Train your employees on policies and procedures to protect the company against fraud. Explain the repercussions of committing fraud and establish a whistleblower system that provides confidentiality and anonymity.
Also, create a culture of trust and integrity with your employees. Employees must know they can come to you with questions or concerns and are rewarded for their honesty. Also, cross-train your employees to handle various financial functions so that one person is not responsible for a specific process or task and is less likely to commit fraud.
Know Your Customers
Customers are the lifeblood of any business, and knowing them well can help you tailor products and services to meet their needs. This can also help you identify potential risks, such as fraudulent activities, credit card fraud, and other types of identity theft.
It is important to establish clear fraud prevention practices with your employees, especially those that deal with cash, high-value merchandise, and customer data. Pre-employment background checks can be a very effective way to reduce the risk of internal workplace fraud.
In addition, all businesses should firmly separate business and personal accounts to avoid costly mistakes due to the mingling of funds and make tracking spending easier. Regular audits of your inventory, expenses, employee time sheets, and accounting functions can also help to deter fraud.
Know Your Accounts
Fraud in business causes significant financial loss, wasted time, and a ruined reputation. Implementing multilayered fraud risk strategies is the best way to prevent it.
Internal thefts (by employees stealing cash, claiming bogus expenses or taking company property) are the most common types of business fraud. These are usually committed by trusted, long-term employees who may be friends or relatives.
Establish clear procedures for approving invoices and expenditures to reduce the opportunity for fraud. Consider using a credit card with security systems to monitor spending and limit access. Set up separate personal and business accounts to make it easier to track expenses.
Encourage employees to report suspicious activity by setting up a confidential hotline. This is the number one way that frauds are detected.
Know Your Financials
Fraud can destroy a business, and the resulting losses can be enormous. But there are simple steps that any business can take to prevent fraud.
Understand your financials – bank and credit card statements, payroll reports, P&L, balance sheets and cash flow. Regularly reviewing these documents can help you spot suspicious activity and stop fraud before it happens.
Educate employees on the signs of fraud and how to report it. It’s also important to create a culture of integrity and transparency. This is best achieved by having leadership demonstrate ethical behavior and setting clear policies.
Establish an ethics hotline where employees and others can confidentially report any suspected wrongdoing, waste, abuse or violations of your policies. It can be as simple as a telephone line or an online reporting system.
Know Your Employees
Employees who commit fraud can cause serious financial loss, damage the company’s reputation and erode the trust of customers. Studies show that employees are often the perpetrators of fraud because of greed, desperation or other personal reasons such as a need to pay bills, drug/alcohol addictions or gambling problems.
Small businesses tend to build close bonds with their employees, resulting in a lack of internal processes and procedures that minimize the risk of fraudulent activity. Ensure your employees know the warning signs of fraud and prevention strategies.
Employees should also know the importance of reporting suspicious activity to management and that the company will take action. Establishing a reporting process allowing anonymous reporting can put employees at ease about their concerns.
Know Your Vendors
Vendor fraud is a serious issue that can have severe consequences for businesses. It is important to understand the different types of vendor fraud schemes and how to prevent them.
A common scheme is check alterations, where employees alter checks payable to vendors and then direct those funds into their accounts. Another popular vendor fraud technique is over-billing, where a vendor inflates invoices for never delivered services. This can be particularly problematic in versions payable departments that are understaffed and overburdened.
Screening new vendor information periodically, incorporating centralized databases, using technology to scan and verify documents, and integrating multiple-level payment approvals can help mitigate the risk of vendor fraud. In addition, separating business and personal credit cards can reduce the risk of breaches.
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