Small Business Fraud: 5 Things You Must Do to Protect Your Business Now

small business frauds

Every year, two out of three small businesses fall victim to some level of fraud. Not all of them know it. Some never will.  The damage may be small and contained … or it may still be growing.

We’ve written a lot about embezzlement and fraud by employees inside the company, but 80% of attempted small business fraud comes from outside of the organization.  That means that your company’s financial data is most at risk after it leaves your office.

How big of a problem is this?  The average small business fraud victim lost $23,100 in 2013. (According to the 2014 Association for Financial Professionals Payments Fraud and Control Survey)

Think you can’t prevent that?  Think again. Here are 5 things you need to be doing to protect yourself and your company.

  1. Go Paperless: Paper checks are the riskiest form of payment — 82% of fraud happens when checks are intercepted, forged, changed, or mis-directed. Cut down on paper checks by using your bank’s Business Bill Pay services (which uses an intermediary checking account to protect you), or by making payments by ACH via systems like (my favorite) or any one of the dozens of other A/P automation companies.
  2. Reconcile Regularly:  When you are the victim of fraud, time is NOT on your side.  You must recognize and report the fraud quickly, so that the bank can begin to look for the problem and so that you can avoid liability. Look at your books at least weekly, and reconcile at least monthly.  If you have an efficient bookkeeper or accountant, ask them to reconcile every day!
  3. Lock it Up:  Banks will do their best to blame you for the fraud — and the law will back them up.  If the bank can show that you are not taking great care with the way your checks are “handled, issued, completed or made payable”, then you may be at least partially liable for any loss due to forgery.  So keep your checkbooks (and credit cards) locked up tight. Do not issue credit or debit cards to employees who do not need them, and do not allow anyone to use a rubber signature stamp for any reason. If the bank can prove you are lax in your practices, the liability will fall back into your lap.
  4. Use a Great External Accountant:  The most important thing you can do is have an objective set of eyes on your books at all times. Outsourcing the finance and accounting functions can actually help prevent fraud — so long as you pick a great accountant. Does your bookkeeper have liability insurance? Do they have references going back several years? Have you run a criminal background check on them?  You simply cannot be too careful when it comes to picking the right person to handle your money.
  5. Leverage Your Bank’s Technology: The best $3 you will ever spend is for the “Check Images” feature in your checking account.  This will capture the image of the checks you write (and those you deposit) so that any hanky-panky will be right there in black and white. And while you’re thinking about how your deposits can be mis-appropriated, don’t forget to also look into either a bank “lock box” for payments or an electronic check scanner.  Either of these will cut down on the handling of checks and deposits, making it that much harder for them to go awry.

Want to learn more?  Here’s a great Q&A page from the Office of the Comptroller of the Currency (part of the US Treasury Department). Check out your responsibilities for preventing small business fraud, examining your bank statements, reporting questionable transactions, and more.

And we’ve also got more great articles about designing your finance function to minimize the risk of business fraud.

Finally, if you suspect any kind of fraud in your small business, act quickly.  Notify your bank. File a police report. And then call FUSE.  We’ve helped many victims of small business fraud to sort out the problems and get back on track.

Dedicated to your (fraud-free) profits, David

photo credit: yoni sheffer via photopin cc

1 Comment
  1. Exactly interesting my Small Business had suffered the same problem.
    I was diagnosed with cancer in 2013 and immediately went through chemo, Radiation and brain surgery in 2014.
    During those time of uncertainty I ask my Nephew and his father to look after the daily operation till I get better.
    That is including hand in employee’s hours and productions worksheet for their pay. The bookkeeper was our friend who looks after the admins at the time.

    After one month from my treatment I came back home with my wife only to find out that between the three employee’s ( Nephew, His Father and Bookkeeper) have orchestrated one of the coward, heartless fraud in our Company. The Nephew father was staying at home in full pay, Nephew got his Normal pay plus the same amount in a different description went to his account plus Extra to the same account. Bookkeeper took the maintenance money $35.00 x 8 employees weekly for 6months plus hidden spending that we will never find out. It is estimated to about $50,000 in one month and brought our company down to face the consequences.

    Those three have been sacked but it will take us at least a year to recover from this let alone recover from my treatment.

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