Fraud poses a serious challenge to the survival and prosperity of small businesses. In this blog, we're going to take a deep dive into the unsettling world of small business fraud.
Thousands of fraud cases get reported by small businesses each year - but that’s just a portion of fraud that actually occurs. About 42% of cases are never reported, and shockingly, only about 61% of fraudsters are fired. (ACFE)
The Association of Certified Fraud Examiners (ACFE) reported that small businesses (those with fewer than 100 employees) experienced the highest median fraud losses compared to larger organizations.
I can tell you from experience finding fraud in your company is a heart-wrenching ordeal. It not only wreaks havoc on business finances, but it also shatters the trust you’ve worked so hard to build. In small businesses, fraud is particularly insidious because we come to think of our employees as family, especially when they’ve been there since the beginning.
Here’s the thing - 85% of fraudsters display behavioral red flags! (ACFE)
But we often overlook the signs when we are close to the situation or care about the person.
The most common types of fraud in small businesses include:
theft of cash or inventory (embezzlement)
manipulating financial records,
and corruption (e.g., bribery or kickbacks)
And no, it’s not just walking away with money from the cash drawer (although that happens too.) Some fraudsters concoct elaborate schemes to cover their tracks - such as fake vendors to pay themselves, credit card charges for personal expenses, ghost employees to collect a second paycheck, Accounts Receivable collections to a personal account - the list goes on.
Don’t get caught off guard! Here are some basic internal controls that are recommended to prevent fraud in your company.
Segregation of Duties
Ensure that no individual controls multiple stages of a transaction. There should be an oversight mechanism built into each process. IE: One person opens the mail and logs the payments, and another person takes the checks to the bank for deposit.
Clear Policies and Procedures
Having comprehensive accounting policies and procedures that Clearly document and communicate roles, responsibilities, and expectations may not stop fraud on its own, but will be instrumental in showing that transactions outside of policy are suspect and not tolerated.
Safeguard physical assets such as cash, inventory, and important documents. Keep check stock and credit cards in a secure cabinet when not in use. Conduct regular physical inventories and reconciliations.
Implement robust IT controls to secure financial systems and data. and use role-based permissions so that access is logged and can be quickly changed if needed. Be sure to update and patch software and systems regularly.
Perform regular reconciliations of accounts, including bank reconciliations and receivables, to ensure any discrepancies are resolved promptly.
Monitoring and Review
Establish a system for ongoing monitoring of financial transactions and controls. Ensure you conduct periodic reviews of the processes to ensure they’re meeting your goals for effectiveness and compliance.
Bigger organizations may wish to establish an independent internal audit function or engage external auditors to Issue audit reports with recommendations for improvement and follow-up on action plans.
Training and Awareness
Provide training on accounting policies, procedures, and internal controls. Educate employees about fraud risks and detection techniques. Encourage reporting of suspicious activities through a confidential reporting mechanism.
According to a study by The Association of Certified Fraud Examiners, email and web-based reporting were three times more effective than phone reporting.
Management Review and Oversight
Ensure active involvement of management in control design and implementation. Establish a top-down culture of accountability and ethical behavior.
Set a schedule to assess and enhance your internal control processes regularly. When you foster a culture of continuous improvement and learning, it gains buy-in from your employees and helps everyone take ownership of the company’s success.
So what are the red flags, you ask? The top five common traits among fraudsters are:
Living beyond their means
An unusually close relationship with a vendor or a customer
Control issues and unwillingness to share duties or information
Irritability, suspiciousness, and defensiveness
But remember - 15% show no noticeable signs at all!
For smaller organizations, fraud prevention could look like an independent Bookkeeping, Accounting, or CFO service to reconcile the accounts and prepare monthly reporting directly to the business owner. They may also review departmental controls periodically and make suggestions for better processes.
Sometimes it takes a fresh set of eyes on your organization to call out irregularities that you hadn’t noticed before.
If it’s time to step up your fraud prevention game, call us, and let’s see how we can work together to protect your company.
We got your back,