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Simple controls can protect your small business against fraud

Small business is the backbone of the country’s economy, and the Gem State is no exception. Idaho’s small businesses account for 96.6 percent of all business in the state and employ nearly 300,000 workers. Unfortunately, small businesses are twice as likely to become victims of employee fraud as large companies. The median loss per fraud scheme is $200,000, a staggering amount that very often a small business can’t absorb.

Considering the potential damage, it would seem obvious that small business owners make fraud prevention a high priority. But many employers are focused on day-to-day operations and assume incorrectly that it “can’t happen to me.” Moreover, while no business owner consciously sets out to hire a fraudster, unfortunately, access, temptation, and financial pressure can lead even the most trusted and beloved employee to commit fraud.

The good news is that even microbusinesses – those employing five people or less – can implement simple controls that can help reduce the likelihood of fraud.

Set the tone at the top

The importance of management operating the business ethically cannot be overstated. Employers should foster a culture of honesty, conduct business with integrity, and set an example of the expected behavior.

Conduct background checks

Check past employers and conduct a criminal background check on any employee who handles inventory and has access to company funds. Before conducting the check, be sure to obtain employee consent. Employers should also run a drug test. Often, employees with an addiction will steal to support their habit.

While no business owner consciously sets out to hire a fraudster, unfortunately, access, temptation, and financial pressure can lead even the most trusted and beloved employee to commit fraud.

• Verify bank statements and cancelled checks each month

The ease of online banking means many businesses are paperless. However, it’s worth a few extra dollars to ask the bank to mail printed bank statements and copies of cancelled checks. A 30-minute review of money in and money out using physical documents is much faster than scrolling and clicking through hundreds of line items.

Control checks to deter check fraud 

Business owners should be the only one to sign checks, and never sign a blank check.

Obtain employee dishonesty insurance

Once fraud has victimized a business, it’s not likely the funds will be repaid even if the thief is prosecuted. While it may seem like one more expense, these premiums do not often “break the bank.” Business owners should carry an employee dishonesty insurance policy of at least $100,000. Consider it a “safety net” against employee theft.

Segregate duties

No one person should be in charge of accounts payable and receivable. Employers should also cross-train and rotate job responsibilities.

Review credit card statements and payroll reports

One of the most common fraud schemes in small business are fraudulent disbursement schemes using credit cards or the payroll function. Review credit card statements to ensure expenses are legitimate. Review payroll reports to ensure pay rates, hours, and deductions are accurate.

Institute mandatory vacations

Workers who don’t take time off can be a red flag of fraud because they fear someone will find out they are stealing.

Encourage whistleblowing

In many cases, employees knew something was wrong but were afraid to speak up. Employers should foster an open-door policy where people can feel comfortable reporting suspicious activity without fear of retaliation.

Monitor employee behavior

One of the easiest ways to spot a potential fraudster is to look at their lifestyle. If workers aren’t earning much more than minimum wage, yet they drive a new car, wear expensive clothing and can seemingly afford expensive vacations or other items, it could be another red flag.

When business is good, employers often take their eyes off the books, feeling assured that money is flowing. However, employee theft isn’t driven by the economy: it’s driven by personal pressure and greed. Fraud does not discriminate, and the impact can be financially and emotionally devastating. Having the proper internal controls in place can significantly reduce the likelihood of being victimized. The time and effort spent enforcing anti-fraud policies is far less costly than the fraud that is committed.

Tiffany Couch is CEO and founder of Acuity Forensics, a nationally recognized forensic accounting firm in Vancouver, Washington. She is also the author of The Thief in Your Company, a book that explores the financial and emotional impact of fraud on organizations of all sizes. She can be reached at tcouch@acuityforensics.com or (360) 573-5158.

About Tiffany Couch