Why Knowledge of Fraud Prevention is Beneficial for Small Businesses

Fraud-related crimes are still a concern, as the information society has provided a plethora of opportunities for new businesses. Cyber criminals and employees within a business constantly look into exploiting weaknesses within a business as the customer journey and internal operations improve. With the additional insight gained, criminal activity becomes increasingly more sophisticated, leaving it up to businesses to fully educate their current employees, as well as themselves, on the potential fraud cases that could arise.

The concept of fraud prevention is essential to the smooth operating of any business, and should not be seen as a process that is set in stone to completely eradicate fraud risks. Fraud prevention is an on-going, cyclic process involving an unset processes including but not limited to situation monitoring, detection, action planning, case management and decision-making.

Small businesses in particular should aim to build upon and continuously learn from past incidents (or any that could potentially arise) during their lifetime of operation, and devise strategies to strengthen their fraud prevention process.

To give you the best chance in effectively protecting your small business against fraud, it is imperative to identify the different types of fraud that could arise, the areas of business that are most vulnerable and the necessary steps to take in event of a situation arising.

Types of fraud to be aware of:

​There are several different types of fraud a small business can be exposed to. This is no different to a large corporation, however smaller businesses are at greater risk, especially newly established ones due to their focus being diverted on to succeeding as opposed to protecting.
We can separate the different types of fraud into 5 main categories:

Assets
Also known as asset misappropriation fraud – this kind of fraud occurs when employees are entrusted to manage assets within an organisation but instead exploit it for their own personal gain.
The types of activity that fall under asset misappropriation fraud include:

• Cheque forging
• Cash theft
• Product and/or service theft
• Expenses theft/False expense claims
• Compensation fraud

Payroll and accounting
Fraudulent activity in regards to financial assets through payroll and accounting is essentially theft of cash from a business via a payroll processing system. There are several ways in which an employee can commit payroll fraud, including:

• Larceny (also known as embezzlement)
• Fraudulent reimbursement (through accounts payable/receivable)
• Fake supplier set-up
• Ghost employee set up
• Advanced payment fraud

Data
Accessing sensitive data that can be used for another’s personal gain is also a form of fraud. Such fraudulent activity includes:

• Trade secret theft
• Access to personally identifiable information (PID)

Bribery
Intending to influence another party for one’s own gain, or acting upon a bribe, is considered fraudulent activity. This includes:

• Bribes and kickbacks
• Product substitution without prior consent

Vendor
In a similar fashion to payroll and accounting fraud, by manipulating accounts payable for one’s personal benefit is one of the most common ways a criminal might commit fraud. Such ways include:

• Billing schemes
• Overbilling/overcharging
• Extortion schemes

Top tips for preventing small business fraud:
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Segregate sensitive dutiesA lot of small businesses depend on one person to be in charge of processing payments, invoices, handling petty cash and bank reconciliation. This can create an opportunity for fraud of assets, so it’s advisable to segregate accounting duties so that they’re not limited to one individual.

Review all statements regularlyHave the original or duplicate bank statements sent to your home/preferred address from the bank. By making it a regular habit to review your statements for anomalies such as unfamiliar suppliers or out of order checks you can keep on top of all ingoing’s and outgoings. By informing your employees that you review all statement independently also acts as a fraud deterrent in itself.

Educate employeesGenuine employees will play an integral role in fraud detection. Employees must be educated in knowing that fraud is not tolerated in the business and how it can negatively impact everyone involved.

Implement clear policiesHaving no clear policies on fraud can leave employees unaware of the detrimental effects it will have to themselves and the business collectively if they are discovered.
By introducing a no tolerance policy and procedures manual that is concise and defines fraud and theft, and the consequences of violating these policies then this will also act as a deterrent. Your policies must cover tangible and intangible assets for your employee’s clarity.

Know your employeesEnsure your latest hires are screened and correctly referenced. Your hiring processes should include a thorough check and includes references from past employees. Fraudulent activity is also likely to happen by established employees who are under financial stress.
Ensure you keep a close eye and regular contact with your employees by conducting regular meetings (teams and on-on-one) and regular reviews.

This article was contributed by Alan Blaney. He has over 30 years experience in the law enforcement field and currently runs Focus Training – a company that helps businesses analyse complex data sets and provides private investigators with training and qualifications.