While every business is susceptible to fraud, small businesses are especially so.
That's because small businesses often have fewer resources to commit to fraud reduction strategies than larger companies, and more "weak links" that can be potentially exploited as a result. A company's own employees often know better than anyone where these weaknesses exist and have been known to capitalize on them for their own benefit.
When they do, the consequences can be significant. According to the American Association of Certified Fraud Examiners, it takes a company, on average, 18 months to detect fraud once it begins. The losses that result from fraud can amount to as much as five percent of a business' annual revenue.
The good news is, there are strategies small businesses can deploy to protect themselves. Here are five ways to start.
- Establish loss prevention procedures. An important first step is to identify where your business is most vulnerable and who is responsible for those areas within your company. Once identified, you can set up internal controls to monitor and measure the activities in those areas, thereby reducing the potential for fraud.
- Conduct internal audits regularly. An internal audit of your accounting function can help determine if fraud is present in your company. Typical fraud schemes include check tampering, "skimming" and expense reimbursement fraud that can, unfortunately, be initiated by trusted employees who have worked for your company for years.
- Automate work processes. Audits are easier to conduct if you automate your financial and banking processes. In doing so, you create an online audit trail that lets you know who has viewed, approved or altered an invoice or payment. By creating automatic reminders and limiting access to billing and payment workflow, you help ensure that nothing slips through the cracks and unauthorized persons are kept out.
- Separation of duties. In a small business, employees must often wear many hats. But that can be risky, particularly if the same person is responsible for authorizing, processing, paying, recording and reconciling financial transactions. It's much safer to segregate duties within your company to create an internal system of checks and balances. An employee who updates vendor addresses, for example, should not have the ability to pay their bills. Separating the approval, data entry and payment processes from one another help prevent fraud.
- Go paperless when possible. Every check or invoice sitting on a desk puts you at risk for fraud. A single check, for example, contains every piece of information needed to access your bank account. By using electronic, billing and payment solutions, rather than paper-based ones, you reduce the risk of tampering and information theft. Receiving payments electronically also helps prevent against deposits into unauthorized accounts.
Finally, it is important for business owners to be engaged in their business' day-to-day activities. While inefficient for large corporations, it is reasonable to expect a small business owner will conduct online banking periodically.
Need more help? Your bank should have other products, services and advice to help protect against payment fraud. iBi