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As a small business owner, you may find yourself more exposed to employee fraud. According to the Association of Certified Fraud Examiners (ACFE),

Small organizations [have] a significantly lower implementation rate of anti-fraud controls than large organizations. This gap in fraud prevention and detection coverage leaves small organizations extremely susceptible to frauds that can cause significant damage to their limited resources.

Fraud within a small business operation may be the hardest to detect. You need to be aware that most small business employee fraud may be perpetrated by some of the more trusted employees you have. They are often long term employees that know the inner workings and processes of your company. You trust them, and therefore, you may subject them to less scrutiny and may not monitor their work as closely.

Fraud Prevention Strategies

As a small business, it may seem expensive to implement complete systems of control. However, according to the ACFE, the median losses from fraud in small organizations were nearly $150,000. Help yourself minimize those losses by doing the following:

  • Screen job applicants: This can include background checks, credit checks, and following up on references. By doing this, you can gather information on a potential employee’s character. However, this alone will not give you all the answers. More often than not, these fraudsters do not fit the typical criminal profile and are usually first time offenders.
  • Segregate duties: This can be one of the most vital controls a business can institute. For this to work as a preventative fraud measure, multiple employees need to be involved. A single employee should not authorize a transaction, write the checks, and also reconcile the bank account. If this is the case, that one employee can take advantage of the entire payment process.
  • Implement basic cash controls: Make sure your check stock is secured and have an approval process in place. It is imperative to regularly review your accounts payable and any other disbursements to ensure that every payment is legitimate because employees can easily pay fictitious vendors. Most importantly, reconcile your bank accounts regularly.
  • Set the tone from the top: Owners and top management should have regular communication with everyone within the company. Consider implementing a policy that addresses forms of fraud and the consequences that follow. Owners and top management that are absent from daily activities and discussions within the company may be opening the door to opportunity. It may also be beneficial to instill a positive work environment. The less disgruntled and stressed an employee is, the less likely they will steal.
  • Conduct surprise audits: Whether you have an internal audit group or use third party auditors, consider having unplanned audits. Keep them irregular as this may deter employees from organizing a scheme.

Although these ideas seem like simple preventatives, it is up to the owners to implement them. Employees will take notice and understand that unlawful behavior will not be tolerated. As a small business owner, if you feel that you would never fall victim to this and fail to have the proper controls or oversight, remember that “if it can be stolen, it will be, and often.”

Nicole Lovato

Nicole Lovato is an accounting solutions senior accountant. She earned a bachelor’s degree in business administration and a master’s degree in financial fraud at Saint Xavier University. Prior to joining Selden Fox, Nicole was a senior tax accountant in the fiduciary group at a Big 4 accounting firm.