Preventing Fraud in Your Small Business

By QuickBooks Canada Team

2 min read

No business, regardless of its type or size, is immune to fraud. However, small businesses are particularly vulnerable due to their lack of resources for monitoring and preventing fraudulent activities. More than 40 percent of fraudulent activities occur internally, often perpetrated by long-time employees, which makes it even more difficult to detect them before significant financial losses have occurred.

Proactive Businesses can Effectively Fight Fraud

The most common forms of fraud experienced by small businesses are:

  • Billing fraud
  • Check tampering
  • Revenue skimming
  • Expense reimbursement fraud

Most small businesses can’t afford the average annual loss of $155,000. It is essential to install fraud detection and prevention measures. Even with limited resources, small businesses can gain the upper hand on fraud by focusing on five key strategies.

Establish Internal Accounting Controls

Most fraud activities are committed by employees with access to the business’s finance and accounting operations. Fraudulent invoicing or vendor billing fraud are typical activities involving employees who oversee both the invoicing and payment functions. Prevent this type of fraud by installing some internal control measures.

  • Separate the accounting functions. While it can increase staffing costs, it can prevent the most commonly perpetrated fraud.
  • Have the business owner or head of operations review and/or approve all invoices.
  • Conduct an internal accounting audit at least annually.

Know Your Employees

Your hiring practices should include a thorough background check that includes reference checks with past employers. Fraudulent activities are more likely to be perpetrated by established employees who become disgruntled or financially burdened. Maintain close contact with your employees to watch for changes in personal circumstances, temperament or productivity. Conducting frequent one-on-one meetings in addition to regular reviews create opportunities to uncover possible red flags.

Implement a Visible Anti-Fraud Policy

Businesses that spend a lot of time talking about fraud with their employees tend to experience less of it. By making it an issue with a proactive education and communication process, businesses put their employees on notice that fraud is not going to be tolerated. Put a positive spin on the discussion by making your employees feel they have a stake in the business and that fraud prevention keeps the business strong. An effective and visible anti-fraud policy should include the following:

  • A policy statement outlining the types of fraud and the company’s position on how it will deal with them.

  • An employee code of conduct.

  • A management review process of all activities that are susceptible to fraud.

  • Fraud education and training.

Create an Anti-Fraud Hotline

Most fraudulent activities detected in small businesses result from a tip hotline. Employees who feel they have a stake in the good health of their company are more willing to report a suspected fraudulent act if they could do so anonymously through a designated website or phone line. The capability to report fraudulent activities should also be extended to customers, vendors, suppliers and even acquaintances of the suspected perpetrator.

Information may be abridged and therefore incomplete. This document/information does not constitute, and should not be considered a substitute for, legal or financial advice. Each financial situation is different, the advice provided is intended to be general. Please contact your financial or legal advisors for information specific to your situation.

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