Small Business Advice

Fraud-Proofing Your Business

Small business fraud is on the rise. If you don't watch your business closely, you may find that profits are slipping out the back door -- in your employees' pockets! Smart small business owners make fraud prevention a priority. Here's how you too can stop small busines fraud in its tracks.

Small businesses experience a much higher rate of fraud than their larger corporate counterparts. Why?

Because the big guys have learned that fraud is something they cannot afford to tolerate if they are going to succeed and they have taken the necessary steps to prevent fraud before it happens.

With a little bit of effort, you can fraud-proof your business just as effectively as the big companies. Here's how:

Hiring

Fraud-proofing begins by hiring employers who are competent and trustworthy. You might be surprised how much you can learn a lot about the character of potential employees before you hire them. Run pre-employment background checks to screen the applicant's criminal history, civil history (fraud-related lawsuits), employment history, education, and references.

Internal Checks & Balance

Implement a system of internal controls - checks and balances that spread the financial duties of the business out among two or more employees and eliminate the possibility that a single employee can embezzle funds undetected. It is especially important to make sure that the same employee does not authorize, process, and record financial transactions within the business.

Audits - Scheduled and Unscheduled

One of the best ways to detect and deter fraud in your business is to conduct periodic audits. Employees should be notified that the company's books will be subject to regularly scheduled internal audits (once a quarter) as well as unscheduled audits throughout the year. At least once a year, your finances should be audited by an external source.

Anonymous Reporting Policy

Employees should also be provided with a way to anonymously report incidents of fraud within the company. Many employees are hesitant to report incidents of fraud because they are afraid of either losing their jobs or being alienated by their peers. Anonymous reporting not only alerts you to potential problems, but also limits the ability of fraudsters to intimidate their coworkers into silence.

Mandatory Vacations

An employee who never takes a day off work is a red flag for fraud. Fraudulent employees fear that whoever does their job in their absence will notice something isn't quite right and their activities will be revealed. Safeguard your company by implementing a policy that requires all employees to annually take at least one week of vacation - in consecutive days.

Drug Screening

Unfortunately, fraud and substance abuse sometimes go hand in hand. The need to finance a drug addiction can cause an otherwise honest employee to do things they wouldn't ordinarily do, e.g. embezzle funds from their employer. Although a substance abuse problem doesn't automatically indicate fraudulent behavior, it is a warning sign that shouldn't be ignored.

Model Integrity

The most effective thing you can do to prevent fraud in your business is to create a working culture that values honesty and integrity. If you take a lax approach to company policies and procedures, your staff will be more likely to "bend the rules", creating an open door for fraud. But if you model an attitude of compliance to your own policies and procedures, your employees will notice and you will be well on your way to eliminating fraud before it begins.

Share this article

Additional Resources for Entrepreneurs

Lists of Venture Capital and Private Equity Firms

Franchise Opportunities

Contributors

Business Glossary