Preventing Business Fraud

Business fraud has been on the rise since the downturn of the economy in 2008. To decrease costs, business owners have elected to take on more of the day-to-day responsibilities of their company’s financials. In small businesses especially, they trust one team member to manage financial tasks with little or no oversight, leaving the company open to fraudulent activity.

How can business fraud affect me?

It seems obvious: business fraud affects you because you lose assets. But the impact goes far beyond a simple loss of cash and goods.

  • Even if the culprit is caught, it can take up to 18 months to recover assets. The impact on cash flow can be extreme.
  • The effect on time can also be severe. Not only do the business owner and team members lose time having to manage the recovery of assets and dealing with court issues, they also often have to take over the responsibilities of the person who was dismissed for committing fraud.

How do offenders commit business fraud?

The most common offenses involve finding a way to pull cash out of the company.

  • Dummy invoices can be added to the accounting system. Payments go to a fictitious vendor and into the offender’s personal accounts.
  • A signer on the bank accounts sets up a new checking account that only they can access.
  • A generous company gives a team member a loan. Instead of paying cash back to the company, the offender makes journal entries to offset the loan.

Fraud is also commonly committed with inventory. For example, warehouse personnel can give a delivery driver an extra pallet of goods that the delivery driver then sells, splitting the proceeds with the warehouse worker.

What can I do to prevent business fraud from happening to me?

  • The number one way for businesses to prevent fraud is by creating and implementing internal controls. For small businesses, separation of duties is most important. Even those whose day-to-day responsibilities do not include financial functions can be included in accounting review or tasks.
  • A close second to internal controls is developing an understanding of how journal entries work. First learn what journal entries should look like for your business. Then review journal entries and question anything that does not make sense.
  • No tolerance policies must be in effect. Management must address any suspicions with employees immediately and directly. Any fraud must result in dismissal and legal action to prevent further fraud.
  • Understand the story of your business from the accounting side. If your financial reports do not gel with expectations based on operations and inventory, investigate.
  • Understand how your cloud-based system is set up, and monitor who has access.
  • Conduct inventory counts. Question any discrepancies. Limit access to expensive inventory and materials.
  • Explore bank fraud-protection services. Many business owners mistakenly believe they are too small to need protections around wire transfers.

What should I do if I suspect fraud?

Do not accuse the suspect right away. Instead, notify accountants and attorneys before discussing your suspicions with any personnel. Your accountant will want to investigate before giving the culprit an opportunity to cover his or her tracks. Your attorney will help you decide if you need to get police involved. Keep conducting business as usual while getting advice from accountants, attorneys and police.

No one wants to believe a trusted employee would commit fraud against them, but the impact on a business is too severe to simply move forward hoping you have hired a trustworthy team. A few simple measures, like implementing internal controls and taking the time to learn how to understand your company’s financial story, can help you keep your company safe.


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