Fraud Prevention for Small Businesses

A man with a credit card on a laptop representing employee fraud

Many small businesses have had to change how they operate due to a reduction in staff or services as a result of COVID-19. As a result, conditions and processes have likely changed for many businesses as they adapt to a reduced workforce. Does this leave them more vulnerable to internal theft or fraud?

In a 2016 study, the Association of Certified Fraud Examiners (ACFE) found that smaller organizations with fewer than 100 employees experienced the highest incidences of fraud because they don’t have the same level of internal controls set up within the organization in comparison with larger ventures. Further, the median loss suffered by smaller companies is approximately the same as that incurred by their larger counterparts. This means that the impact of business fraud can be much more significant for small businesses.

Below, we will outline some key detection and prevention strategies that small businesses can implement to reduce their risk and mitigate losses due to fraud.

Common Signs of Business Fraud

Detection of unusual activity is usually the first indicator of internal fraud. What are some common signs to look out for?

Here are 10 common warnings:

  1. Unexpected charges to your organization’s bank accounts
  2. Inaccurate information on your credit report
  3. Cheques are significantly out of order on your bank statement
  4. Receiving credit cards that you have not applied for
  5. Unreasonable denial of credit
  6. Debt collectors contact you about merchandise that you did not purchase
  7. Notification that you have been denied credit that you did not apply for
  8. Notification about changes that you did not make with respect to addresses or passwords
  9. Your bank account has been frozen unexpectedly
  10. Suppliers contacting you with unexpected charges or invoices

How Can Business Owners Proactively Uncover Fraud?

Here are some techniques your company can use to uncover fraud:

  1. Install an anonymous hotline. A hotline provides a mechanism for employees to report something that doesn’t look right without getting personally involved. The ACFE reports that over one-third of all frauds are uncovered by a tip from someone in the know. Sure, some discontented staff member may use the hotline to cause trouble for another employee, but the odds are high a good portion of those tips will be legit. An even better reason to have this installed is to lower your losses when fraud does occur.
  2. Run your employees’ addresses against the address file of your vendors in the master vendor file. Any matches should be investigated. There are legitimate reasons why there may be a match, but generally, these are limited. Be sure to make adjustments if any travelling employees are included in the master vendor file.
  3. Create an internal report to document any changes to the master vendor file. This report should be run at regular intervals as appropriate for your business’s activities, usually either weekly or monthly. Its purpose is to identify any unusual or potentially fraudulent activity related to fictitious suppliers.
  4. Complete background checks on any employee with access to money or financial accounts. Someone who has committed fraud before is likely to repeat it, especially if the individual is having personal financial difficulties.
  5. Vendor applications should be required and reviewed by your accounts-payable person. The review can be cursory; simply checking to make sure the vendor exists on public records is a control to ensure an employee isn’t setting up a fraudulent vendor. Further, vendors should be checked for connections to existing employees.
  6. Employ the “eyeball test” when it comes to reviewing data. Train your employees to take a step back and look at the data objectively. Does it make sense?
  7. Set up responsibilities by employing appropriate segregation of duties. Sometimes when a new function or process is put in place, the segregation issue is completely overlooked. By implementing a system where at least two separate individuals are responsible for carrying out a specific process, you can help to reduce fraud. When one person is solely responsible for overseeing a process, they have more opportunity to engage in fraud and get away with it.

While it would be ideal to prevent fraud entirely, the best thing an owner/manager can do is to uncover it before the fraudster gets too far along in the game. The goal of these tactics is to help your organization do just that.

Employee Relations to Help Reduce Fraud

From an organizational behaviour standpoint, business owners should be sure to regularly touch base with their employees. This not only ensures increased employee engagement, which engenders greater loyalty, it also helps to ensure a happier, more cohesive team. It can also have the benefit of helping to reduce employee fraud by identifying employees of concern.

Employees who are facing financial struggles in their personal lives can be a greater risk to commit fraud, especially during the current economic situation when many people are facing hardships. Employers who are taking advantage of subsidies such as the Canada Emergency Wage Subsidy should keep their employees informed on the process. This will help to reassure them that you are doing all you can to ensure they remain working throughout the pandemic, and earning pre-COVID-19 income. Making your care and concern for their wellbeing clear will motivate your employees to give you their best efforts.

How Edelkoort Smethurst Schein CPAs LLP can Help

If you are a business owner looking to learn more about how you can improve fraud prevention and detection controls in your business, please contact the team at Edelkoort Smethurst Schein CPAs LLP by calling 905-517-2297 or reaching out online. Their corporate accounting professionals will advise you on how to best protect your business.