Small businesses usually have limited resources when it comes to implementing fraud prevention controls.
A substantial number of them have a single owner and fewer than 25 employees. These businesses usually have been passed down from generation to generation and employ a couple of long-term, highly trusted employees – many times hired by an owner from the previous generation.
How can a small business, with a single owner and a small number of trusted employees, put fraud prevention controls in place without spending thousands of dollars?
The answer is simple. Owners must take a proactive role in preventing fraud in their businesses. After all, they’re protecting their money. As the old Fram Oil Filter slogan said, “You can pay us now or you can pay them more later.”
Small-business owners can personally implement inexpensive fraud deterrent measures, or they can risk the consequences of a major loss that can cripple their business significantly or even close their doors.
The important point of owner implementation of fraud-deterrent measures is appearance. The tone must be set at the top, and that starts and finishes with the owner.
If employees witness an owner demonstrating a carefree spending attitude or treating the employees as second-class citizens, a general feeling of resentment will build. The employees may feel that they’re doing all the work while the owners are carelessly spending on themselves.
Owners should evaluate how their actions are perceived by their employees. The greater the resentment by employees or the more “they won’t miss a little here and there” attitude takes hold, the greater the risk that fraud will eventually happen.
Owners must always give the appearance that all employees are being checked or that the owners are always looking over each employee’s shoulder. Honest employees will have no problem with this and will even welcome the philosophy.
Implementing this one control could very well be the deterrent employees need when faced with pressure in life to abscond with a company’s money. The feeling that there is a greater chance of being caught plays on the ego of employees who may have the potential for committing fraud – and the image of how they want peers, friends, family and the community to perceive them.
Small-business owners should never instill too much trust in any one employee or group of employees, no matter how long the employees have been with the company. Time and time again, an employee that everyone thinks would be the last person to commit fraud is the one who commits the fraud.
Many times owners and co-workers have no idea about the financial or emotional pressures a perpetrator has been facing in private life until it’s too late. When a person is overtaken with hopelessness, all moral boundaries can be erased, making it easier to do things that are normally out of character, including fraud.
An owner should always check employees’ work. Never take anything for granted or make blind assumptions – even about family members employed by a small business.
Five years ago, an owner’s son initiated a $360,000 embezzlement. The son was having an affair with the company’s bookkeeper. When confronted with the evidence, the owner was in shock, refusing to believe that his own son would steal from him and the company the son had a minority interest in.
What can you as a small-business owner do to prevent or reduce the risk of fraud? Here are a few things to do regularly, involving very little time and cost:
- Make a point of taking each month’s unopened bank statements out of the mail and reviewing them in private. Ideally, the statements should be sent to your personal residence for review.
- Make sure employees see you hand the opened bank statement to the bookkeeper or controller every month – giving the appearance of a review. It also gives you a chance to review the checks cashed during the previous month, spot any unusual items and investigate them independently.
- Avoid using a check stamp with your signature. Personally sign each check issued after reviewing the invoice package accompanying the check. You will have a better understanding of the business and be better equipped to detect an unusual vendor or company expense.
- On an irregular basis, send out balance confirmations to customers to independently check accounts receivable balances. You don’t have to wait until the year-end audit. Also, make sure your employees know this procedure is performed at no predetermined time.
- Keep unused check stock in your possession. Sign an authorization each time a supply is used by an employee who processes the checks. All numbers should be sequentially ordered and accounted for.
- Pay to get the copies of both sides of the checks returned with monthly bank statements. You’ll save large bank charges you would have to pay to obtain copies of the endorser’s signature side if you later detect fraud. You’ll also have the information available to determine whether an employee is depositing any company checks in a personal bank account.
- Try to have employees bonded – at a minimum, those handling cash-sensitive transactions and involved directly with cash.
- Perform extensive background checks, and always phone a potential employee’s references.
- Make it known that your door is open. You might offer small loans to employees that they can repay through payroll deduction. If they are in financial distress, this option can reduce the pressure and rationalization to commit fraud.
- Require employees to sign an annually updated fraud policy statement. It should emphasize that fraud will not be tolerated and will be prosecuted to the fullest extent of the law.
- State that any fraudulent act witnessed by another employee should be reported immediately. Build a culture in which an employee who is aware of unreported fraud will be viewed in the same light as the person who committed the fraud.
These and other actions can prevent or, at the very minimum, significantly reduce your business’s fraud risk.