I recently recorded a podcast for AllBusiness on fraud prevention in small businesses. Chris Bjorklund and I sat down and talked about some of the risks and ways to prevent fraud in small companies.
You can hear the podcast here.
The following is a summary of the key tips I offered to listeners.
Basic internal controls that are often overlooked:
- Segregation of duties so that one person doesn’t have total control over an area of a company – Have checks and balances between employees.
- The owner of a small company should get involved – If there is a bookkeeper in charge of all the financial matters, the owner should take an active role in looking at bank statements and monitoring key accounts.
- Use good hiring practices to find the best emploees – Verify past employment, do reference checks, look at criminal records if it’s allowed by law.
Establishing a code of ethics is an important step for companies of all sizes. Not only should management create a code of conduct, but they must make sure that employees understand it and it must be enforced.
Some things that should be included in a code of ethics:
- General guidelines about behavior at work
- Specific instructions related to things like conflicts of interest, expense report honesty, ad receiving gifts from vendors
- How should employees report fraud
Get employees involved! They are generally honest, and most employees are willing to help look for fraud if they know what to look for. One of the most common ways fraud is detected is though an employee tip, so let’s give them some tools to help fight fraud.
Basic fraud prevention techniques:
- Make sure you’re not always operating in fire drill mode. Establish a level of normalcy in the operations so that employees get a feel for how things should be. That way, they’ll have a better opportunity to identify unusual situations and transactions.
- Have clear lines of authority. Employees should know who they report fraud suspicions to. Who is the next person up the chain of command?
- Let employees know how you handle complaints about suspicious behavior. How will employees be protected from retaliation? How will complaints be investigated? What information will be made available after the investigation?
Big frauds start small.
- Every fraud starts somewhere and grows from there.
- Sometimes an employee is just planning on “borrowing” money and paying it back later. But the situation snowballs over time.
- Greed can play a part. An employee sees that no one has noticed any missing money, and takes that as a cue to steal more.
- A need, perceived or real, can help initiate a fraud. An employee doesn’t have enough money for a need or a want, and sees the company’s funds as a way to fill that need.
Profile of an employee who commits fraud:
- People in higher positions commit larger frauds because they have more access to information, assets, and people.
- Changes in behavior might signal a fraud-in-progress or a greater propensity to commit fraud.
- Uncooperative or excessively negative employees could pose a greater risk of fraud because they may easily justify stealing from an employer they don’t like.
The fraud triangle:
- Opportunity – having a chance to commit a fraud and conceal it
- Motivation – feeling a pressure or need that can be fixed with a fraud
- Rationalization – the process by which the employee makes the fraud “okay” in her or his mind
Tips for small business owners to reduce fraud:
- Get actively involved with the company and the finances
- Make sure employees have a way to report fraud
- Have an open-door policy, so that employees feel comfortable voicing concerns
- Hire the right employees