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Small Businesses, Big Fraud Risks

04.14.2021

It’s not always easy being small. For one thing, small businesses (with fewer than 100 employees) experience higher occupational fraud losses: a median $150,000 vs. $140,000 for larger companies, according to the Association of Certified Fraud Examiners. That’s because they don’t always have the staffing or financial resources to implement fraud-prevention programs. Small businesses are also much more likely to fall victim to certain types of fraud — including check tampering and payroll schemes.

Ask your advisor

Private companies aren’t required to have annual audits, but your small business can still work with your CPA to determine where you might be at risk. He or she can train you to recognize the warning signs and help you reduce opportunities for fraud by, for example, segregating duties in your accounting department.

Periodically ask your CPA to review your receipts and disbursements with an eye toward uncovering irregularities. And if you have inventory that could tempt thieves, ask your advisor to verify inventory counts and observe inventory procedures for potential loopholes.

Don’t fall short

One area where many small businesses fall short is in conducting background checks on potential employees. Check all work references and consider running criminal background checks. Workers with a history of occupational theft often seek jobs with small businesses because they think pre-employment screening likely will be minimal.

Even if you don’t have a large enough staff to implement strict segregation of duties, you can still establish oversight procedures that allow you to understand and verify financial information. This might mean reviewing bank statements before they go to your bookkeeper and reconciling them yourself every month. Also set a dollar limit on the checks that employees can write without authorization to protect against check alteration.

Finally, don’t overlook the value of treating employees fairly. Many employees rationalize fraudulent activities because they feel underpaid or underappreciated. Make sure your pay scale is competitive by comparing it with prevailing wages in your area. And take employee complaints — particularly if they’re about possible illicit activities — seriously.

Give employees a voice

One of the best ways to provide employees with a voice and catch fraud before it leads to major losses is an anonymous reporting mechanism — such as a hotline or web portal. We can suggest affordable reporting solutions and help you establish an effective anti-fraud plan.

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