9 Ways to Minimize Fraud at Your Small Business

Research conducted by several organizations have indicated that the incidence of fraud that happens at small businesses is both on the rise, and that it can cost U.S. businesses as much as 5% of their yearly gross revenue.

Perhaps one of the reasons why fraud is more prevalent at small businesses, as opposed to bigger and more established ones, is because they usually have a harder time detecting it, oftentimes because they don’t have the capacity and systems to do so.

As a small business owner, chances are that you would rather be more focused on trying to grow your business, or even keep it afloat, and consequently will be more inclined to expend your energy in this regard, as opposed to trying to detect fraud that may or may not be happening at your business.

Having said that, here are 9 ways that a small business owner can try and minimize the incidence of fraud in their business.

  1. Supervise Your Employees

Whenever supervision is lax in an organization, it potentially leaves room for unscrupulous behavior by some employees, some of which might include fraudulent activities of one kind or another. It is therefore important to put in place simple systems that can keep track of many of the goings on in the business, without the owner needing to always physically check up on these things, but rather only do so periodically, while the systems do the bulk of the work.

Things like using an employee time clock to monitor employee work time, or not giving employees direct access to certain sensitive company data or accounts, but rather using a password manager to give them indirect access, without revealing the login credentials, are a few examples of simple supervisory things a business owner can do.

  1. Screen Job Applications

Employees are often the backbone of any business and can make or break it in more ways than one. It is therefore very important that you be very careful about who you let into your business by way of employment. The process of hiring any new employee in your business should be such that it greatly reduces the chance of hiring the “wrong” people, or at least, people who are not the best fit for your company and company culture.

You should therefore be sure to conduct as extensive a background check as possible on a job candidate, not just checking things like any possible criminal background, but also possibly looking into their moral and ethical principles, which might give you clues into their character, which can potentially help you spot things that may be at odds with your business’s culture.

And even though these checks are no guarantee that an individual who checks out clean on all fronts won’t commit fraud, but when you combine it with all the other things written about in this list, then you can potentially begin to significantly reduce the possibility.

  1. Cash Controls

Nothing tempts employees like loose money lying around. Depending on the nature of the business, some businesses often need to keep petty cash for some operational needs, and this can often give rise to petty theft.

According to the Association of Certified Fraud Examiners (ACFE,) there are three types of cash theft, namely: cash larceny, skimming and fraudulent disbursements. Whatever type of theft that occurs at a small business, the one highly probable underlying factor that aids in its happening, is the lack of oversight or basic controls that can prevent such fraudulent activities from taking place. Things like random financial spot checks or external audits. Then there is also the fact that many small business owners often place too much trust in key employees, and are often unwilling to entertain the thought of financial impropriety by such employee, even when the signs might be present.

  1. Delegate

Generally speaking, placing too much responsibility in a single person can potentially lead to problems, and not just from a productivity standpoint. In the case of preventing fraud, delegating a specific task to a specific person, but more especially when it concerns money, means that in the event that something untoward happens, then there can only be one person to hold accountable. Conversely, in a situation where more than one person has access to company cash, it can often be difficult to pinpoint exactly who took it, if such happened, and it is exactly this situation of, “ there’s several of us, they can’t pin it on me,” that gives rise to such thefts.

  1. Communication

Communication is as vital in the work or business environment as it is in personal relationships. It is therefore important to ensure that open lines of communication exist between all employees of the business. Besides the benefits this can have to an improved work environment, such open communication channels can also potentially limit the incidence of fraud.

This is so because open lines of communication, especially as it regards fraud and other untoward behavior at the company, can send a very clear signal that there is zero tolerance for such activities, to the extent that criminal prosecutions, in extreme cases, will be sought, otherwise it will be immediate dismissal. Such policy should also be clearly stated in an employee handbook. The idea behind this is that employees clearly know that there will be dire consequences for any fraudulent activity, and knowledge of the consequences of a bad behavior, can often be a good deterrent to such behavior.

  1. Reporting Systems

Having a good reporting system in place for all employees, vendors, and customers can make it easier for individuals to report fraud or any other violations of policies and procedures within the company. It also makes it easier for such violations to be independently noticed.

However, over and above having a good and efficient reporting system, steps should be taken to ensure that such systems are actually used by people, possibly anonymously for obvious reasons. And whenever any such reports are filed, they should always be taken seriously and looked into immediately.

  1. Audits

Having random and unannounced financial audits and fraud assessments is yet another great way to deter fraud. Even better if such audits are done by an external body. The fact and knowledge that there will be frequent external audits will often make employees have a second thought about committing any financial impropriety. And if they do indeed carry out such acts, then there is a high chance of them being caught.

  1. IT System

Any and all businesses, big and small, should ensure that they employ the latest technologies that are relevant to their businesses, and in the case of the subject of this discussion, those that can assist them in fighting and preventing fraudulent activities in the workplace. Some of the more common technologies in question are things like a strong and regularly updated firewall, malware, spyware and antivirus software, implementing a very strong password policy regime, among others.

  1. Insurance

After all is said and done, and despite a business’s attempt to prevent fraud, they will not always be successful in doing so, and such fraud will sometimes occur. In such circumstances, all a business can do is to ensure that they can recover from it, and the best way to recover from a fraud incident is to get compensation from your insurance company. This obviously means that such insurance policy must have been taken out prior to the fraudulent act being committed.

To this end, all businesses should ensure that they take out good business insurance cover for a whole range of business activities to which they have exposure to.

Tony Crighton

Tony Crighton is a practicing New York business attorney at the law firm of Small Business Attorney NYC, who are specialists in all legal matters related to business law. He has been a practicing attorney for over 15 years and has a diverse and broad range of experience. Connect with @small_biz_law on Twitter.

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