Measures that small businesses can undertake to prevent fraud

The business environment has grown from simple to complex, financial transactions have become more complex and fraudsters have become smarter to system manipulations.

Did you know small businesses are at a higher risk of fraud than large organisations?

While most business face similar threats of economic changes, competition or human resource, small business prove to be more susceptible to fraud due their informal nature, fewer staff – resulting to less oversight – or lack of appropriate prevention measures.

Fraud is defined as any intentional act or omission designed to deceive others and resulting in the victim suffering a loss or the perpetrator achieving a gain.

According to the Association of Certified Fraud Examiners, most occupational fraud falls into three categories: Asset misappropriation, whereby an employee misuses company assets; corruption, in which an employee accepts a bribe; and financial statements, in which the employee “cooks the books” for a healthy bottom line.

Regardless of the nature of the fraudulent activity, the propensity for loss is tremendous.

Fraud can be viewed in two broad categories: internal and external. Internal fraud is mostly associated with employee theft – from lost inventory to unethical accounting practices and the theft of actual financial assets.

External fraud is much broader. It may come from customer theft though use of bad cheques, stolen credit cards or counterfeits bills or through collusion with third parties on overbilling of goods or advanced fees.

While insurance is one way of protecting your business there are more ways small business owners can protect themselves. Here are some of the measures:

Take interest in the books

Often owners of small businesses concentrate on growing the venture and have the employees work the books. We have even heard them tell book keepers, “You are in charge of the books. I don’t want to know the details unless there is a problem.”

This attitude is present in most fraud cases perpertrated against small businesses. Controlling your cash is the most important aspect of your business and the easiest to scheme. Take interest in understanding how cash is received, recorded, deposited and used to pay vendors. AReview financial reports on a periodic and random basis.

Separation of duties

You will find many small owners being the “jack of all trades”. I recall visiting a family-owned business that was selling water. You could not tell who was in charge of accounting, sales, inventory or book keeping. All seemed to participate in all functions.

A fraud assessment revealed that the company was losing at least 10 per cent of its profits via cash skimming. Because responsibilities are shared in small businesses, duties should be restricted within the system.

Have an outside accountant

Not every business owner is trained on accounting procedures and reporting. Are you able to understand what the “numbers” are telling you? You do not have to be an expert in every field but find an individual who can translate your company’s performance. In a company where you rely on one or two employees to work on invoicing, accounting and billing it is advised to have a “third” eye on your financials.

Employee hiring

When searching for a new employee or external contractor, do your homework and know who exactly you are hiring. Today, fraudsters come in many forms and tend to be patient with their plans. In addition, business owners should ensure policies and procedures around fraud and theft are communicated to an employee at hiring. Your policies should clearly state the definition of “fraud” or “theft” and the consequences of violating these policies.

Book keeping

One of the key challenges with small businesses is book keeping. Most entrepreneurs seem to concentrate on how much money is coming into the business and ignoring the expenses. Ensure there is adequate documentation to support transactions, accounting reports and statements.

Mumbi is a business and financial advisor at Anchorage Limited. [email protected]