Fraud prevention is better than cure

by | Nov 23, 2019

Small business owners face many hazards.  In fact, most of us have found ourselves – at least once – asking “Why am I doing this?”

Fraud is one of those, and unfortunately it doesn’t get a lot of consideration by business owners and managers.  Then one day, it’s too late …

This post was written for and first appeared on Inside Small Business.

Knowing your employees personally, and feeling you can trust them with a level of autonomy is often key to business success, growth, and freeing us, the business owners, from the day-to-day running of the business. Just as importantly, employees who feel empowered by responsibility, are more likely to be productive and have higher engagement with their work.

However, the (often overlooked) flipside of these trusting relationships is the potential for fraudulent activity. Small businesses like us, unfortunately, can be particularly vulnerable to falling foul of these trusting relationships. The more informal systems of small businesses, with lower levels of checks and balances, are vulnerable to exploitation and misuse by employees.

According to Ernst & Young, fraud against small business almost always falls into one of five categories:

  1. false invoicing
  2. transferring money to another bank account
  3. cheque fraud
  4. payroll fraud
  5. theft of cash.

Most of these breaches of trust are unsophisticated and carried out by a single person from within an organisation.

As a small-business owner myself, I understand how we wear many hats at once, that our employees may also be multi-tasking, and we are unlikely to have an internal audit department! The good news is that there are some steps business owners can take to minimise their risk through fraud.

1.Conduct crosschecks and audits

Have crosschecks in place for deposits, bank withdrawals, invoicing and other key financial transactions. Schedule regular internal audits, or, if your company can afford it, hire an external qualified auditor. Employees are less likely to consider or commit fraud if they are aware that the company conducts regular audits. Better still, conduct a surprise one.

2. Divide responsibilities

Never let a single employee handle all or the majority of financial responsibility. Separate the financial functions amongst your team so that no single employee has too much financial access. Separate your personal accounts from your business accounts.

3. Use technology wisely

Technology can be used and abused, including within a business. I have seen several instances where a trusted employee has access to the business owner’s bank login details, including personal accounts, to pay bills. All the major banks have the technology to separate payment creation and authorisation functions. They do have fees, but using this system is cheaper (and less stressful) than recovering from a case of fraud.

4. Research potential employees

Even when you are excited about bringing someone new into your team, do your homework. If you are hiring someone that will have access to company cash, credit cards, bank accounts, company books and sensitive data, do a thorough background check.

5. Monitor employee behaviour and holidays

A loyal employee who hasn’t taken a sick day or leave in years may seem ideal. Unfortunately, this can be a sign of hiding some form of fraudulent activity. Be aware of those who always start early or work late, and are reluctant to take time off.

6. Create a clear corporate culture

Have a corporate code of conduct, and a clear statement of your company’s attitude to fraud (including that you will prosecute). This sends a strong signal to everyone that you are proactive in the prevention of fraud for your business.

While it’s not possible to completely protect your business against breaches of trust, taking these steps is a good place to start. Being aware of your vulnerabilities and creating robust systems is not only useful for compliance – it is a great way to minimise the risk of loss through fraud.

I hope you never have to experience the awful, sick feeling in your stomach that comes with realising one of your trusted employees has stolen money from your business.

This post first appeared on on November 21, 2019.