MoneyWatch: June 2007

Preventing Small Business Fraud

Small Business fraud is on the rise and preventing it before it occurs is essential. According to a 2006 report by the Association of Certified Fraud Examiners, businesses with fewer than 100 employees usually suffer bigger losses than large organizations. In this year the median loss for small businesses was $190,000. Median losses at larger companies were lower, ranging from $150,000 to $179,000. Some believe small businesses are more susceptible to fraud because of the close relationship between owners and employees. However, loss also happens from outsiders who make their living scamming small businesses.

While no business owner wants to feel it employs people capable of stealing from them, in reality it happens often. Various factors push people to steal and taking the necessary precautionary methods should be a top priority.

First things first, hire the right employees: Get the applicants written permission and check background information, including previous employment, education, and criminal activities. This task can often be overlooked, but if you find any lies on a resume or application, chances are this person is not trustworthy.
Maintain strong internal controls over checks and balances
Assign responsibilities in a way so that employees are constantly seeing what others are doing and unofficially checking their co-workers activities.
Conduct surprise audits: Don’t give an employee time to cover up any wrongdoings
Establish a third-party hotline: This gives employees the chance to voice concerns about co-workers through an uninvolved person.
Enforce mandatory vacations: An employee who does not want to take a vacation may be hiding something and afraid that if they leave, their secret will be discovered.

Fraud also occurs from outside scammers looking for ways to cash in at the expense of your business. The key to preventing this type of fraud is awareness. Small business owners are experiencing the following scams:

Pre-Pay Shipping Scam: People will order large amounts of products, usually ordering heavy items to increase the shipping costs. They will give credit card numbers for the order and ask the business owner to cover the shipping costs in advance and to be sent to a PO Box. You later find out that the credit cards are stolen after you have already sent the shipping costs payment.
Overpayment Scam: You will receive a payment that is more that the purchase amount. Assuming the person accidentally overpaid, some will write a check to the purchaser for the difference before the original check clears.
Faulty Invoices: This is the most common scam small businesses encounter because of the large number of invoices received.

For more information on internal and external fraud, click on the links below:

Resources
COSE: How to Avoid Employee Theft and Fraud
COSE: Frequent Fraud- Who do you trust?
Association of Certified Fraud Examiners: Examine Your Business
The Wall Street Journal: Running the Show, Inside Jobs
Entrepreneur.com: Common Small-Business Scams
FindLaw for Small Businesses: Do’s and Don’ts for Employee Fraud
A Manual for Business Professionals: How to Prevent Small Business Fraud. By the Association of Certified Fraud Examiners (ACFE); available from ACFE, 800-245-3321; 205 pages; $59.

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Research assistance for MoneyWatch is from Cleveland State University Nance College of Business Administration.