small business fraud

Small Business is the Number One Victim of Internal Fraud

By Tiffany Couch

According to the Census Bureau’s Annual Survey of Entrepreneurs, small businesses with fewer than 20 employees account for 89 percent of U.S. employers. In fact, the strength of America’s employment and job creation can be credited to the power of the thousands of small businesses that propel our economy, innovate, and create new companies and jobs.

As a small business owner, I can well appreciate the blood, sweat and tears you go through to see your dream come to life. That’s why it’s especially disheartening to learn that small businesses are the most likely to experience employee fraud. Worse, by the time the theft is discovered, it costs upward of $200,000 – a loss so great that many companies cannot survive. Even more unfortunately, most business owners never think fraud could or would happen to them. The good news is there are simple and inexpensive controls that can dramatically reduce the likelihood of fraud happening in your business.

  1. Set the tone at the top. The connection between employee theft and a business’s ethical atmosphere is critical. The behavior and actions of management trickles down to employees. To promote a culture of honesty, conduct your business with integrity and establish a zero-tolerance policy against employee dishonesty. Employees will follow suit by upholding the ethical standards you model.
  2. Conduct background checks. Even if you are hiring a friend or family member, or the candidate seems as sweet as pie, take the extra step to run a criminal background check – especially if that employee will handle cash or have access to company financials.
  3. Deter cash receipt theft. Small businesses are twice as likely to be victims of cash schemes. These occur when an employee pockets money before it’s even made to the till (or your bank account). To control this theft, make sure all sales are receipted and require manager approval for any refunds or voids.
  4. Review bank statements and cancelled checks. Most small business owners are so busy keeping the day-to-day going, it can be easy to skip this important measure. However, most fraud can be detected right away simply by reviewing the bank statement and paper copies of cancelled checks to ensure payees are both authorized and receiving the correct amount of money.
  5. Review payroll reports after they’ve been disbursed. Many employers approve payroll and then neglect to take the time to review it after it’s been processed to ensure what was paid was the amount that was authorized. This step makes sure employees are receiving what they earned, and that appropriate taxes have been withheld.
  6. Segregate duties. If at all possible, assign different responsibilities to different people. One person should prepare the invoices, while another person oversees customer payments or customer credits. In a micro business (those employing five or fewer employees), consider cross-training and rotating duties among staff.
  7. Obtain employee dishonesty insurance. This type of coverage protects your business in case of employee theft or fraud. It covers the loss of both cash and goods, and for most small businesses, premium costs are just a few hundred dollars a year for a $100,000 policy.
  8. Impose mandatory vacation time. Employees who steal don’t want to get caught, so to avoid their actions being discovered they often work longer hours and never take time off. Make sure employees use their PTO, and that a colleague is covering their job duties while they are gone.
  9. Institute an open-door policy. Forty percent of all fraud is caught because someone spoke up about witnessing suspicious behavior. Encourage whistleblowers to come forward, and follow up on every tip. Not only does this show your staff that you trust them to be honest, but it can reveal the thief in your company.
  10. Monitor expense reimbursements. If employees are allowed to use their own finances for work purchases, establish a reimbursement policy. Even a small business can institute simple procedures, such as requiring all charges to be summarizing on an expense form with the date, purchase and amount; requiring original receipts; and ensuring management pre-approves all purchases.

For any business, fraud is both financially and emotionally devastating. Beyond the loss of cash, there’s the overwhelming sense of having been betrayed by a trusted employee. Taking the time to implement simple, cost-effective measures can help protect your business from fraud. As Benjamin Franklin so wisely said, “An ounce of prevention is worth a pound of cure.”

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Tiffany Couch
Tiffany Couch is CEO and founder of Acuity Forensics, a nationally recognized forensic accounting firm. She is also the author of “The Thief in Your Company” – a book that explores the financial and emotional impact of fraud on organizations of all sizes.

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