As a small business owner, you may be thinking, “We’re so small, no one here would steal from me.” Or, “Fraud could never be a problem. Only large companies have to worry about fraud.”
In reality, small businesses are particularly vulnerable to fraud because they have fewer resources and, often, fewer and less-effective anti-fraud controls. The losses experienced by small businesses also tend to have a greater impact than they would in larger organizations.
The types of fraud in small business differ from those in larger organizations. Billing schemes are the most common fraud committed in smaller organizations. An example of a popular billing scheme is when an employee sets up payments to a fictitious vendor. Goods are not received and the employee converts the payments to his or her own benefit. The “vendor” will likely not have a physical address, no incorporation records, no website and will not be found in the phone directory.
Other examples of common frauds in small business include cheque tampering, payroll fraud and skimming schemes. Cheque tampering schemes can be as simple as employees writing cheques to themselves. Payroll fraud can occur when an employee falsifies his or her timecard for personal benefit and there are no reconciliations performed to catch the fraud.
Another example of payroll fraud could be a bookkeeper issuing a duplicate paycheque in a fictitious name and having the money deposited into their bank account. A common skimming scheme is when a cashier collects cash from a sale and does not enter the transaction into the accounting records. As a small business owner, there are certain indicators of fraud you can watch for to protect your business.
10 red flags of fraud in small business
•Employee lifestyle and behavioural changes
•Weak internal control environment/lack of segregation of duties (for example, one employee handles all the bank statements, cash transactions and deposits)
•Management overriding company policies or controls
•Financial results inconsistent with market trends
•Dismissive, unreasonable or slow responses to questions from staff
•Lack of convincing documentation or information (for instance, lack of original receipts for expense reports)
•Large number of account write-offs or unexplained adjustments
•Accounts not reconciled on a timely basis
•Unexpected change of vendor or a vendor without a physical address
•High employee turnover/employee who does not take vacations
An outright lack of controls is noted as the primary weakness in more than 45% of fraud cases that occur in small businesses. While it is unlikely that fraud can ever be completely eliminated from a business, steps can be taken to manage the risks :
•Ensure there is proper oversight and internal controls. Based on the size and type of your business, assess specific fraud schemes that pose the greatest threat and implement internal controls that make the most sense.
•Control the company’s banking records and credit cards. Open and review bank and credit card statements regularly. Watch out for any tampering by reviewing the cheques and statements for signs of missing, out of sequence, unauthorized or unusual cheques.
•Perform routine reviews and reconciliations. You will lower the company’s fraud risk if employees know that reviews and reconciliations are being performed. Consider performing unannounced checks on high-risk areas.
•Hire the right people and know your employees. Perform background checks, verify employment history and consider obtaining credit checks to lower the risk of hiring an employee with a poor financial history, which might be motivation for fraud.
•Demonstrate due diligence on the part of management by setting a good example and an ethical tone for the organization. If staff see you taking cash out of the till they may think it is acceptable for them to do the same thing.
•Train your employees in fraud prevention. Ensuring they are knowledgeable about basic fraud prevention will lower your company’s fraud risk.
•Do not dismiss your own suspicions or your employees’ concerns. Fraud is often committed by long-standing employees you trust. Make sure all your concerns are given appropriate attention. Trust is not an effective fraud control.
•Implement a confidential whistleblower program with supporting policies. A high percentage of frauds are identified by whistleblowers.
•Remember that recovery is difficult and sometimes impossible, so prevention is key.
