Submitted by: Jae Fomby
Your clients rely on you for sound business advice. And sometimes the best advice is hard to give. In the case of fraud, youll need to tell your small business clients some uncomfortable truths.
Your clients probably underestimate the risk of fraud
According to the world’s largest anti-fraud organisation, the Association of Certified Fraud Examiners (ACFE), small and mid-sized businesses are the most common victims of organisational fraud. And the effects can be more damaging.
Small businesses report 31.8 percent of all instances of fraud a higher rate than for larger businesses and suffer greater losses in relation to their size. And more than half of all small businesses that suffer fraud dont recover any losses.
The types of fraud that your clients need to be aware of fall into three categories:
theft
financial statement fraud
asset misuse
ACFE says theft is the most common, including:
stealing cash
claiming fake expenses
taking property
Employees are the main culprits, which can be tough for your small business clients to swallow. They often consider their employees as friends or members of an extended family.
What makes a business vulnerable to fraud?
There are many conditions that allow fraud to take hold:
Employees perform multiple functions, allowing them to hide their actions.
Staff become too familiar and trusting with each other.
The absence of formal procedure means things dont get recorded.
Staff lack the expertise to recognise fraud.
Its vital that small businesses take steps to deter fraud and detect it as soon as possible.
When youre meeting with your small business clients, here are 10 important things to say:
1. Dont let one employee do all the accounting and bookkeeping
Because of their size, many small businesses have one person that always handles bookkeeping functions like:
client receivables
processing client payments
paying invoices
managing petty cash
recording functions in the accounting system
This makes it easy for cases of fraud to go unnoticed. Businesses should have at least two people handling these functions with accounting and cash-handling separated. You might also suggest that your firm acts as a virtual CFO to provide extra oversight.
2. Make sure you know your employees really well
It might seem like an obvious fraud prevention tip, but you need to stress the importance of credit card security to your clients. They probably know they should be careful, yet they may still mix business and personal accounts when its convenient to do so. That can result in costly errors such as tax fines or penalties.
Separating accounts also makes it easier to record business expenses. Encourage clients to protect credit card information and to use secure, online bill payment services wherever possible.
3. Maintain robust internal controls and processes
Small businesses often feel immune to fraud but you should encourage clients to introduce controls. They can detect (and help prevent) fraud by:
restricting employee access to financial account data
limiting access to inventory or stock
establishing multi-person sign-off for:
– expense claims
– overtime
– cheque writing
– other accounting or payroll functions
using audit logs or audit trails to track and trace all financial transactions
4. Watch your business bank accounts like a hawk
Of all the fraud prevention tips, this ones become really easy to implement. Online banking makes it quick and painless for your clients to check account activity whenever they like. Its worth doing, to make sure that paper-based statements havent been manipulated.
The key items to look for are:
missing or out-of-order cheques
unknown payment recipients
payments made to unrecognised businesses or personal accounts
Simply letting staff know that youre reviewing account activity can help prevent fraud.
5. Make sure you audit high-risk areas often
Your clients should routinely audit areas of their business that deal in:
cash
refunds
product returns
inventory management
accounting and bookkeeping functions
Employees should be told that audits will take place but there shouldnt be a schedule. By making the audits random, your clients are more likely to dig out fraud.
The ACFE also offers a check-up to assess fraud prevention processes. Even if your client doesnt have anything in place, this check-up can be a good place to start.
6. Train your employees to prevent fraud
Its really important that employees in fraud-prone areas of small businesses are taught how to:
identify fraud
prevent fraud
report suspicious behavior by coworkers and customers
Help your client educate staff about some of the common warning signs. Set up an anonymous reporting system, too. Itll make it easier for employees to share information about suspicious activity.
Your clients should create an official code of ethics to demonstrate that fraud wont be tolerated. This will also help reinforce that fraud is a crime, which is important. People sometimes kid themselves that unethical behaviour is victimless when theyre in a business setting.
7. Protect your businesss credit card information
It might seem like an obvious fraud prevention tip, but you need to stress the importance of credit card security to your clients. They probably know they should be careful, yet they may still mix business and personal accounts when its convenient to do so. That can result in costly errors such as tax fines or penalties.
Separating accounts also makes it easier to record business expenses. Encourage clients to protect credit card information and to use secure, online bill payment services wherever possible.
8. Know who your business partners are
Your clients should record basic information about the people they do business with. This should include:
physical address
contact names and phone numbers (at least two)
mutual business relationships or references that can be checked
For further peace of mind, your clients should look up the businesses theyre dealing with to check:
theyre a legitimate business
who the owners are
how long theyve been in business
There are other great sources of background information like the Companies Office.
9. Check into every case no matter how small
These fraud prevention tips only help if clients follow through. They must look into reports or suspicions, no matter how small or unlikely they seem. Its important not to:
become complacent with long-serving staff
be distracted by the daily pressures of running a business
The earlier fraud is detected, the better the result for the business and the culprit.
10. Get expert help if things dont add up
If a client follows your fraud prevention tips and the numbers still dont add up, you may need to get more involved in auditing the business. Or you could refer them to ACFE for help with fraud detection.
Fraud prevention starts with a conversation
Small business owners consistently underestimate the threat of fraud yet studies show they face the greatest risk. If they feel awkward about introducing fraud prevention measures with trusted staff youll have to play the bad cop. They can tell their staff its all your idea.
As a bonus to your client, many of these strategies such as dividing responsibilities and getting two sets of eyes on the books also help with quality control. Encourage them to get started today.
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