The Risk of Fraud at Small Businesses

Fraud is a threat to all organisations. But small businesses can face an even higher level of risk. They don’t have the same level of anti-fraud controls in place as larger corporations. They often have employees handling several different roles, including within the accounting department. At many small businesses, it is not uncommon for a single employee to handle accounts receivable, accounts payable and bank reconciliations, for example. Without proper segregation of duties, a trusted employee can take advantage of their situation and steal from their employer for years before being detected.

Statistics from the Association of Certified Fraud Examiners (ACFE) show that “The smallest organizations tend to suffer disproportionately large losses due to occupational fraud. Additionally, the specific fraud risks faced by small businesses differ from those faced by larger organizations, with certain categories of fraud being much more prominent at small entities than at their larger counterparts.” That comes from the ACFE’s 2014 Report to the Nations on Occupational Fraud and Abuse.  

There are some things that small business owners can do to try to protect their company from fraud. Among them:

Implement Employee Background Checks

CRI Group has conducted background investigations for clients in which we’ve found that individuals have lied about their education, their work history, and even their criminal background.

Remember that it only takes one dishonest employee to sink an entire business, so making proper hiring decisions is crucial. Pre-employment background checks provide an increased level of security, especially for positions that involve handling cash, merchandise or accounting duties.

Establish an Employee Code of Conduct

Make sure your staff know that fraud and other unethical behavior won’t be tolerated at your company. Adopt a code of conduct, communicate it to staff and make sure all new employees sign it at the beginning of their employment.

Segregate Duties

While this can be a challenge for smaller companies, it is important to divide activities so that no single employee has too much control over certain are of the business. For example, the person who has custody of the checks should not have the authority to sign them. Payroll checks should be approved and signed by the business owner.

Don’t Skip Audits

Conducting regular audits will not only act as a control for fraud – it will also help you uncover waste and other inefficiencies and problems with your business. They should be performed annually or more often if possible.

If You Suspect Fraud, Get Help

When the red flags of fraud do appear, it is important to take action immediately. Most small businesses don’t have a fraud expert on staff, nor the expertise to handle such an investigation themselves. Call a third party. At CRI Group, our agents are trained to handle any type of investigation, no matter how large or small. A consultation can help you determine what next steps need to be taken.

Fraud will always be a serious threat to small businesses. But by having controls in place and educating employees, any organization can increase their protection and minimize risk.