Fraud Detection and Prevention for Small Businesses

Fraud-related Engagements

Any business, no matter the size or scope, has a potential risk of fraud. In fact, according to the Association for Certified Fraud Examiners (ACFE), small businesses are actually the most vulnerable to fraud. According to a study published in 2002, the smallest business organizations, those with less than 100 employees, has the highest levels of fraud. A yearlong survey found that the largest companies (with over 1,000 employees), suffered an average loss of $97,000 during the year while the smallest category of companies averaged $127,500 worth of losses during the year.

Here are some of the most productive ways to prevent fraud from your small business, as suggested by certified fraud examiner and member of the ACFE John Gill.

Let People Know You Are Detecting for Fraud

While this step might be obvious, Gill says that “perception of detection is a very powerful deterrent.” This means that by simply letting your employees know that you are watching for fraud, it is less likely to occur.

Hire Trustworthy Employees

Anyone who may potentially work for your business should receive a background check, which includes history on previous employers, other personal references, criminal records, past education and any certifications. Gill also suggests conducting drug tests because sometimes individuals will steal company money to fuel their addiction. Especially if someone is handing cash or inventory, you want to ensure they are trustworthy.

Balance Accounting Duties

If one person is responsible for processing payments, making bank deposits, paying invoices, and handling petty cash, it may be easy for them to adjust numbers and puts your assets at risk of fraud. Dividing all of these accounting duties will create a system of checks and balances that ensures one person does not hold too much financial power. Thereby, reducing the change that someone will take advantage of the power to commit fraud.

Utilize Surprise Audits

Catching an employee when they are least expecting it can be one of the most effective methods of uncovering fraud. As John Gill suggests “the key is that an employee generally doesn’t know what’s coming and won’t have the time to change the records to hide the fraud.”

With this surprise look into your company’s finances, anyone who is committing fraudulent activity will not have time to cover up their actions.

Insist on Paid Vacation Time

If an employee refuses to take vacation time, that might be a major red flag. Gill mentioned how his research shows that an employee who is unwilling to leave work may be covering up unethical or fraudulent activity.

While many of these methods may seem intuitive, they are small steps that can go a long way in the prevention and detection of fraud.

At Ellrich, Neal, Smith & Stohlman, P.A., our staff includes five Certified Fraud Examiners who are involved in fraud detection and prevention engagements. Such engagements include evaluation of an organization’s internal controls, identification and measurement of frauds, and implementation of procedures that will reduce the risk of falling victim to fraud schemes in the future.

Past fraud engagements have resulted in successful recoveries in both civil and criminal actions. Contact our Orlando, Miami, or Palm Beach Gardens offices today to learn more.