Protecting Your Business from Fraud

In 2018, businesses reported losing over $7 billion dollars to fraud schemes. Small businesses reported losing a median $200,000 due to fraud, while businesses with more than 100 employees reported $104,000 in loses due to fraud. This presents a big issue when it comes to small businesses and what can be done to prevent becoming a victim to fraud. This article will delve into what a fraudster looks like, the reasoning behind committing fraud, common frauds plaguing small businesses and prevention methods that could be put into place for a small business owner.

So, what does a fraudster look like you may ask? There is no way to answer that question because fraudsters take many forms. Fraud can be committed by your most trusted employee, your best friend, and even a relative. The fraud triangle is a tool used by many forensic accountants to determine why someone commits fraud. There are three elements that must be met for a fraud to occur. The first element that must be met is perceived unshareable financial need on the part of the fraudster. This could be unexpected medical bills, car maintenance, or simply just living paycheck to paycheck. The next element that must exist is perceived opportunity. This means that an employee feels that he or she can reasonably commit the fraud and not get caught. And lastly, an employee must be able to rationalize the fraud. This is as simple as saying “the company makes enough money,” or “I don’t get paid enough.” These three elements form the fraud triangle, and have been noted in every fraud case brought to light.

Small businesses encounter many challenges in day-to-day operation.  Fraud can easily slip through the cracks. Some of the most common frauds to watch out for are payroll fraud, cash theft, online banking, and fake vendors or invoices. Due to the increasing reliance on technology, paychecks are directly deposited into the employees account without the owner ever signing off. This allows for a payroll preparer to alter his or her pay, click submit, and no one is the wiser. Another fraud plaguing mostly cash businesses is skimming, which is when an employee takes cash paid to the business and puts it directly in their pocket without the owner’s knowledge. This can create a cash flow vs. inventory problem, but it likely won’t be detected until it’s too late. Online banking allows funds to be transferred from the company account to other bank accounts. An employee with access to the bank account can easily send him or herself money from the company account, and without watchful oversight, the transfer would likely go undetected. Lastly, companies should spot check invoices being paid out. Anyone with a computer can put a fake logo on an invoice template and make it seem like a legitimate business expense. Know your vendors and know what products you are actually receiving versus what you are being invoiced for.

Though it may seem impossible for a small business to deter and detect fraud, there are internal controls that can be put in place to ensure that you are not the next victim of the 2,500 plus cases of fraud committed annually. One of the best internal controls in my opinion is the separation of duties. The person that approves invoices to be paid should not be the one writing the check to pay the vendor. Ideally a business should have a third person involved to sign the check before it is sent out. Another internal control is to create a control environment. Basically, promote ethical values and integrity within your business at all times. This could even include a way to discreetly report fraud as 40% of all reported frauds in 2018 were discovered because of an employee tip. A final internal control is an internal audit. Randomly select work done by employees with financial roles within your business to ensure accuracy and that company procedures are being followed.

One of the most important sayings I was taught throughout my tenure at Georgia Southern University (Go Eagles!) is “Trust but verify.” Trust that your employees are being honest and ethical, but verify by setting up internal controls and having appropriate checks and balances within your organization. Although you may think you know and fully trust your employees, you never know what their true ulterior motive may be.

All statistics taken from the 2018 Report to the Nations published by the Association of Certified Fraud Examiners. A copy is available for download at https://www.acfe.com/report-to-the-nations/2018/default.aspx.

T. Chase Matthews

Chase is a Certified Fraud Examiner with KRT, CPAs and is double jointed in his hands and arms.