Preventing fraud might be last on your to-do list as a small business owner, but it deserves top billing. According to the Association of Certified Fraud Examiners (ACFE), businesses with fewer than 100 employees experienced a median fraud loss of $150,000 in 2016. That’s significant to your bottom line and to your culture at large. Fortunately, there are simple steps to help you deter and detect fraud within your small business.
Common Types of Fraud
Because fraud comes in many forms, it can be overwhelming to start assessing and managing your risk. To begin, anti-fraud professionals encourage small business owners to examine their relationships with both employees and external suppliers. Even the most trusted individuals might be unknowingly resentful or in financial trouble, which may cause them to commit fraud against your business.
Fraud occurs in many forms, like stealing cash or inventory. It might be an employee misusing an expense account or exaggerating an injury to claim undue worker’s compensation. On the other hand, perhaps a supplier is substituting inferior products to reduce their own costs or committing invoice fraud. In any case, your alarm bells should be sounding.
A more complicated type of fraud involves intellectual property and trade secrets theft. Copyright infringement is a serious crime, and if left undetected, it could damage your brand, reputation, and overall identity.
With spotlights shining brightly on these common types of fraud, you can safeguard your small business, and it doesn’t have to cost a huge amount of time, staff, or money.
Reduce the Risks
The potential pitfalls are numerous, but you can take steps in the right direction to minimize your risk. A strong action plan can help every small business owner avoid becoming the one in four who fall victim to fraud each year. Here are the five areas that can most immediately benefit from heightened awareness and security:
1. Vet Your People
As a small business owner, you may not have a human resources department to conduct background checks or even place a phone call to a prospective employee’s references. But this is crucial. By making sure you hire knowledgeable people without a history of lying, cheating, or stealing, you are combating fraud right away.
2. Introduce a Fraud Policy Statement
Explain that fraud will not be tolerated by any employee and that it must be reported if observed. By designing a contract that you ask all employees to sign, you put your expectations in writing, and let everyone know that your company values honesty. Consequences should also be outlined and enforced if employees violate the contract (note: we recommend that you sign the contract as well; business owners are not immune to their own company’s fraud policies).
3. Open Your Door
For continued success with vetted employees and a fraud policy statement, open communication is key. They should feel comfortable voicing concerns to avoid feeling resentful, which could lead to taking advantage of the bottom line. They also need to be able to relay anything suspicious they might see within your company. As an added benefit, some businesses offer small loan services to employees that are repaid through payroll deductions; this option may deter fraudulent behavior if someone encounters financial hardship.
4. Check on Suppliers
Look for red flags with any vendor that you are considering. Does this vendor’s federal tax identification number, phone number, and address match the listing with the IRS? Does this vendor have a criminal past, pending lawsuits, or irregular invoice patterns? If you think something doesn’t add up, it’s worth asking the questions.
5. Guard Your Intellectual Property
Fraudsters often target the trademarks, copyrights, and patents of small business owners. This ranges from taking your logo to create brand confusion to selling your client list to a competitor. By adding an intellectual property section to your Fraud Prevention Policy, your employees will be aware of your expectations and company culture. Intellectual Property Insurance is also available when patents are involved.
Fraud management can be daunting; however, it is necessary for every small business. Your bottom line is at stake, and you can be a positive force for change. Our professionals can help your business establish a fraud prevention policy and minimize exposure to risk. Contact us with questions.