For as long as there have been businesses, there have been people trying to steal from them. But the image of the gun-wielding criminal demanding money from the safe can distract from the danger posed by fraud. These criminals prefer to stay under the radar while their schemes are in motion. That is why certain types of fraud can be so difficult to eradicate.
There are things you can do to help guard against small business fraud. Tweet This For starters, it helps if you’re aware of common techniques used by fraudsters. This allows you to direct your attention to areas most vulnerable to theft and mismanagement. Here are seven common types of fraud that affect small businesses, and suggestions for trying to prevent them:
1. Check Tampering
Forging, altering, or stealing a check from a company bank account is known as check tampering. The best ways to help protect against this common type of fraud include keeping the company’s checkbooks locked away, regularly taking account of all checks – including voided payments – and reviewing bank statements as they’re delivered. The perpetrator may keep their withdrawals relatively small to try and avoid detection, so it’s important that you have an up-to-date picture of your bank accounts.
Skimming occurs when money is taken from a business before it’s recorded. In its simplest form, an employee might pocket cash at the register without ringing up a sale. If this is the case, even balancing your receipts with total cash for the day won’t reveal the theft. Check your inventory on a regular basis. If items are missing and can’t be accounted for on receipts, someone may be skimming.
3. Billing Fraud
In one scenario, an employee with bad intentions sets up a shell company, then bills his employer for fictitious goods or services. Billing fraud also occurs when an employee submits an invoice to the company for personal purchases. Either way, the business owner has been duped by a disingenuous employee.
This type of fraud is best prevented by requiring your signature and approval for all business expenses, regularly reviewing the company’s list of vendors, and having different people responsible for invoicing and issuing payments. These protections can make it more difficult for someone to sneak in improper bills.
4. Reimbursement of Expenses
Many companies reimburse employees for legitimate business expenses, such as mileage or hotel bills. This is only fair. Unfortunately, employees who submit fake receipts or try to get funds to cover personal purchases take advantage of the system. You should require receipts for all reimbursements, along with a stated business justification. Something as simple as “Entertaining client A” should suffice.
The company should also require the business owner or finance head to sign-off on these expenses. Keep an eye out for suspicious spending patterns, like unusually large requests from the same employee month after month.
5. Cash Larceny
Cash larceny typically involves theft of cash from the company after it has been recorded in the books, but before the funds can be deposited. Albeit on a smaller scale, theft from the company’s petty cash pool is also a common occurrence.
The best way to protect against cash larceny is to stamp all incoming checks “for deposit only” with the name of your company. In addition, cash deposits should only be made by the company’s owner to ensure all funds make it to the bank. Balance your cash register receipts at the end of each business day to make sure payments are accounted for.
6. Payroll Fraud
In this scenario, the employee causes the employer to issue a payment for false compensation claims, such as phony overtime or paychecks for people not on the company payroll.
The size of your business can affect measures you take to prevent payroll fraud. If you only employ a handful of people, you may be able to monitor their hours simply by paying a little extra attention during the day. This isn’t feasible if you employ dozens of staffers. Instead, you can require employee signatures on all time cards and make them come into the office to claim physical checks. That way you should be able to spot people on the payroll who don’t belong. You might also offer direct deposit, which is convenient for employees and ensures paychecks are going to the right people.
7. Non-Cash Fraud
While cash is king, many criminals are happy to steal merchandise or inventory. Known as non-cash fraud, it can be equally costly to a business.
The most effective way to avoid non-cash fraud is to initiate very tight inventory controls. Tactics can include making periodic inventory counts, installing surveillance cameras, and increasing the presence of physical security.
Managing Employees & Trust
It’s important that you be able to trust the people you employ. While safeguards against fraud should be put in place, they’re often no substitute for your own gut instincts. If someone has broken your trust in the past, do you really want to keep them on staff? When suspicious behavior comes to light, be sure to investigate. By the same logic, honest employees shouldn’t feel like they’re under a microscope. Finding the right balance of security versus trust is a challenge facing all business owners.
Spotting Fraud with Business Credit Reports
Small business fraud can directly affect your business partners. For instance, if an employee alters a check meant to compensate a supplier, they’ll never receive the payment. If the supplier reports this debt to a business credit bureau like Dun & Bradstreet, it can negatively affect your business credit scores and ratings. Monitoring your business credit is another way to keep an eye on the financial health of your company, and to spot nefarious activity.
Fraud is one of many risks a business can face. Learn about other common business risks and how to help prevent them.
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