Monday, 19 February 2018 15:55

How to Prevent Fraud in Small Businesses

The most cost effective way to limit fraud losses is to prevent fraud from occurring in the first place. Easier said than done of course. Small businesses have significantly fewer anti-fraud controls than large organisations. This gap in fraud prevention and detection leaves small businesses susceptible to frauds that can cause significant harm to their limited finances.

Small businesses are especially susceptible to fraud because they lack basic accounting controls, tend to have a higher level of trust in staff and are less likely to be audited.

Common fraud schemes more prevalent in small business include the following:

  • Billings from fraudulent vendors/suppliers
  • Skimming money from unreported sales or collections
  • Cheque Tampering
  • Issuing fictitious refunds
  • False Expense Reimbursements
  • Financial Statement Fraud.

Fraud losses on small businesses are compounded as they typically have fewer resources with which recover the funds stolen from their business.

It is vital therefore, that small businesses ensure that they put in place measures to mitigate against the threat of fraud. While it is understandable that small businesses do not have the resources necessary to invest in some of the more expensive internal controls, several measures can still be implemented with minimal investment.

Fraud Training for staff members

Training should clearly set out to employees what constitutes fraud. It should reflect the type of threats that exist against the business in the industry, how to identify it and how to take steps to report fraud. More importantly, the training should clearly reflect the consequences to the business should fraud be perpetrated against the business.

The training should also include the business’s zero tolerance policy to fraud clearly indicating what steps will be taken against those who commit or attempt to commit fraud against the business and how any allegations of fraud will be investigated..

Ensure there is an effective fraud reporting mechanism in place

Increasing would-be-fraudsters perception of being caught is one of the main ways a business can deter those thinking of committing fraud.

One method of doing this is to make employees aware of how to report concerns about known or potential fraud and wrongdoing. To encourage staff to come forward, staff should be aware that they could report suspicious activity anonymously and/or confidentially and without fear of reprisal.

An anonymous reporting channel, such as a third-party hotline, should be made available to employees. The small business should also ensure that their reporting policies and mechanisms extend to vendors, customers and other third parties.

Ensure there is an effective Fraud Response Plan in place

Encouraging employees to speak up, without implementing an effective response system, will fail to effectively deal with the harmful effects of fraud. A small business should have an effective Fraud response plan in place, which will allow their business to investigate matters in a swift timescale, taking preventative action before the reported incident further impacts its business.

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