Accounting Tips to Prevent Fraud in Your Small Business

While you want to believe the best in everyone you meet, at some point it is likely that your small business could be vulnerable to fraud. The truth is that scammers often target small- and medium-sized businesses more frequently than large corporations because these small companies don’t have the same security measures in place. Unfortunately, the effects could be disastrous to your company – which is why it is essential to be proactive to prevent fraud.

Fraud: Will it Bring Down Your Company?

Too often, small businesses are running on thin profit margins and tight cash flow. Whether you are trying to get the company off the ground, or you are working through growing pains to expand, every penny matters in the long-term success of your efforts.

Regardless of the size of your company, fraud could be the final straw that breaks the camel’s back. Losing money due to theft or scams might bring down your company. As such, you need to have a solid system in place to not only detect potential fraud cases, but also prevent fraud whenever possible.

A shocking report from the Association of Certified Fraud Examiners (ACFE) shared that most businesses lose around 5% of annual revenue due to fraud that is committed by managers, employees, executives, and owners. Even if you think that you have a good relationship with every member on your team, you can’t make assumptions that your company is immune from fraud. Smart business owners develop policies and stay up-to-date to ensure they are protecting their livelihood from theft.

Common Types of Business Fraud

The term “fraud” covers a range of dishonest activities that could occur within a company. Business fraud means that one or more people are committing illegal acts for financial gain. Often, these activities are hidden in daily activities or legitimate business transactions.

Here is an overview of some of the most common types of business fraud:

  • Personal Purchases: Using business funds to purchase services or products for personal use. For example, an individual might add personal spending on a corporate credit card, or approve his own expense reports to cover up the transactions.
  • Asset Theft: Employees can steal office equipment, inventory, or any other assets from the business. Often, these items are stolen, then sold for cash.
  • Fake Payments: The creation of fake invoices can be one way to move money out of the company. Another common practice is to use “ghost employees” on the payroll, fake people so someone can collect the paychecks.
  • Skimming: Collecting a little off the top can go unnoticed for a long time, especially if you don’t have a good accounting system in place. For example, a person might take a portion of the funds before the transaction is listed in the accounting records.
  • Identity Theft: Sometimes employees access the personal information of other employees or customers, then use the identity to access credit lines. If someone gets their hands on bank statements, tax ID numbers, or financial reports, then they might be able to steal enough money to commit identity theft.
  • Fake Bills: There is quite a bit of fake cash circulating around the United States, and it’s possible that these bills could come through the doors of your business. Most counterfeit bills are high-valued, such as $100 bills. Accepting fake money means that you will lose out on the cash, which cuts into your profit margins. If you want to prevent fraud, then it is important to have systems in place to check these bills at the register.
  • Return Fraud: Customers can also commit fraud against a business using various return fraud strategies. Common issues include customers who buy an item, use it, and then return it. Or, sometimes people steal products from the business, then attempt to make a profit by “returning” these items to the store.
  • Digital Fraud: Someone doesn’t need to be in your office or workplace to commit fraud. Scammers can hack into different computer and software systems to steal valuable information, such as customer details, credit card numbers, bank account info, and more.
  • Workers’ Compensation Fraud: While it is important for employees and customers to be protected on your property, some people take advantage of the system by claiming injury or illness to get money through Workers’ Compensation insurance. For example, a person might be injured outside of work, then claim it is the result of work activities. Some employees are even bold to the point where they make up an injury or illness.

Since fraud is so prevalent among businesses of all sizes, it is impossible to list all of the potential fraud situations that might occur. The above list gives you an idea of the many ways someone might take advantage of your company. Your responsibility is to be proactive to prevent fraud, helping to reduce the likelihood that these issues will happen to you.

Tips to Prevent Fraud

Where should you start if you need to implement new fraud prevention systems? Here are a few main categories that need to be addressed:

  1. Digital Security: Scammers have more access than ever to private information because they can hack in through internet connections. Don’t leave your company exposed digitally! Choose software programs that have built-in security features, such as encryption and two-step verification. Also, talk to your tech team about proactive digital security on all servers, computers, cell phones, and internet connection points.
  2. Accounting Services: Don’t make the mistake of having only one person managing your accounting and bookkeeping. Often, small businesses only need a single person to keep up with client payments, receivables, invoicing, managing cash, and other accounting-related tasks. When one person is handling the finances, it increases the likelihood of fraud to go unnoticed. You can prevent fraud by assigning multiple people to oversee the financial reports. Or, consider hiring a trusted outsourced accounting team to implement checks-and-balances, as well as regular accounting audits.
  3. Background Checks: A formal hiring process can be a valuable step in knowing the people you are bringing into your company. Even though a background check is an extra cost when hiring a new employee, it is essential to know the history of every person you entrust with financial records or cash. The more an employee interacts with finances and sensitive information, the more scrutiny you should put in regards to their background check. Personality isn’t enough to prevent fraud – the truth is that most employees committing fraud are well-liked by their managers and coworkers. These fraudsters are proactive in endearing themselves to others so they can gain trust.
  4. Internal Audits and Controls: Setting up systems can be a critical step to prevent fraud. For example, it’s appropriate to restrict access for employees who don’t need information about inventory or financial details. Design multi-person checkpoints for payroll processing, check writing, and reimbursements. Have a solid plan in place for regular accounting audits to review bank account statements and activity.
  5. Lock Up the Files: Not only do you need to password protect digital files, but it is also important to be sure that paper records are kept under lock and key if needed. Invoices, customer information, bank records, and other sensitive documents can be used for fraud. If a paper is sitting out, an employee could easily snap a picture on their cell phone to collect the information undetected.
  6. Employee Training: Not only do you need fraud prevention training when onboarding new employees, but it is also important to offer ongoing fraud training. Your employees should be taught how to identify the warning signs of fraud. If an employee suspects suspicious behavior among customers or coworkers, then they need to feel comfortable to report the situation without worrying about their job. Create a code of ethics and maintain open communication so employees can share information safely.
  7. Take it Seriously: One of the fastest ways to discredit your fraud prevention efforts is by dismissing reports of fraudulent activity. When there are suspicions about things that are happening in the office, then you need to be proactive in researching the situation to see if it is a valid claim. Regardless of the size, each case should be given its due based on your no-tolerance fraud policy.

Prevent Fraud with Good Accounting

A solid accounting system provides a good foundation to help you prevent fraud and avoid issues in the future. When you are tracking the transactions and you have systems in place to reduce the risk of skimming, you can rest assured to know that there is a low likelihood of losing money due to fraud.

How are you protecting your company? If you need assistance with general accounting services and fraud prevention, then Easier Accounting is here for your business. We offer the support you need for everything from payroll processing to tax strategy: Call to learn more about why accounting is an important service to compliment your other efforts to prevent fraud: (888) 620-0770.

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