Fraud Prevention

February 5, 2018 Caitlin McElwain

Small businesses often have limited resources for fraud prevention programs. Yet they’re among the biggest targets for fraudulent activities, with revenue losses related to employee-perpetrated fraud estimated at over $3 billion per year, according to the Canadian accounting associations.

To avoid falling victim to fraudulent activities, small businesses should identify and prevent risks for fraud within their organizations. Read on to learn how to fight fraud in small businesses.

9 Steps to Prevent Internal Fraud

Internal fraud is perpetrated from within the business by its employees. Unfortunately, this constitutes the most common type of fraud. Use the following tips to help develop a fraud prevention program for your business.

  1. Know your fraud risks
    Determine where your company’s specific vulnerabilities lie in order to create and implement internal prevention controls.
  2. Employee background checks
    Check references, employment and educational history to ensure there’s no previous history of fraud or illegal activity. If you’re filling a position to manage the company’s assets, you may want to consider conducting a credit check with the authorization of the candidate.
  3. Ensure monitoring of cash situations and create a system of checks and balances
    Have security cameras installed to monitor activity at registers and in inventory storage areas. Expenditures should always have a multi-step approval process consisting of a manager and an accountant to ensure validity of expenses and to run the math. Additionally, key business functions should never be handled by a single employee, as this makes fraud easier to conduct and to cover up.
  4. Conduct surprise audits 
    If you do not have internal auditors, have your accountants periodically visit and audit specific functions of your business where fraud might occur. These audits are less designed to discover fraud and more to act as a deterrentas employees will know it will be more likely to be uncovered.
  5. Control the banking
    Small business owners should check bank statements themselves to avoid cheque tampering. Watch for missing cheques, cheques issued out of sequence, unknown payees, cheques which look altered, cheques not signed by authorized signatories, or any other unusual items. Conduct bank reconciliations once a month, and consider using online banking tools if you regularly have many transactions and large dollar volumes.
  6. Use only approved vendors
    This can help fight billing schemes and phony invoices. A list of management-approved vendors should be available to all staff, and this list should be routinely checked against invoices. Look for unknown vendors, vendor names similar to approved vendor names, vendors with no physical address or phone number, or vendors with addresses matching an employee’s address.
  7. Create and communicate your company’s fraud policy 
    Make all employees aware of what activities constitute fraud, the tools being used to combat it and the company’s zero-tolerance policy on fraud. Ensure employees know what to do and who to contact if they suspect fraud and be sure to inform employees about the actions the company will take if it is determined fraud has been committed. Often. the communications themselves become a deterrent to fraudulent activities.
  8. Employee Assistance Programs 
    Often internal fraud is committed by employees undergoing hardships who feel they have no other alternatives. An employee assistance program can help mitigate this risk and if a formal program is too expensive, institute an open-door policy, where employees can approach management for help if it is needed.
  9. Take action when fraud is discovered 
    Obviously, the punishment should match the offence, but having a fraud policy is useless if you are unwilling to enforce it. Once small frauds are overlooked or permitted without repercussions, larger ones become possible. Consider options such as suspensions, demotions, salary cuts, probation, dismissal and legal action for differing levels of violations.

Preventing Common Types of External Fraud
Scams targeting small businesses range from strange office supply orders to fake invoices. Here’s a short guide on common types of fraud and how to avoid them:

  1. Fake domain name renewal notices
    Be wary of unsolicited letters encouraging you to renew your website domain name or suggesting a new one.
  • Check that the renewal notice matches your existing domain name. Watch for small difference like “.org” instead of “.ca” or missing letters in the web address.
  • Check that the notice comes from the same company with whom you registered the domain name.
  • Check your records for the expiry date of your existing domain name and see if it matches the notice.
  1. Fake Yellow Pages directory listing or other unauthorized advertising 
    This type of fraud may be disguised as a solicitation for an update of an existing advertising product you have purchased, or as an offer for a free listing when it is actually an order for a listing requiring payment at a later date. Other times, the communication may be disguised to look like it is from Yellow Pages when it actually is not. 
  2. Office supplies that were never ordered 
    Watch for invoices for goods they never ordered. Often this will be for items regularly ordered, such as paper, printing or maintenance supplies. Keep records of all orders placed and check these against all invoices received. In some cases, you may receive phone calls which falsely claim to be from their “regular supplier” with a limited-time or special offer. Supplies offered in these calls will be overpriced and of bad quality. Always deal directly with your supplier contact or directly dial your regular supplier to confirm this offer is indeed from them.
  3. Equip your front lines 
    Make sure your staff processing invoices or answering phone calls is aware of these types of fraud, as they will often be the main points of contact. Always check that goods or services were ordered and delivered before paying an invoice.
  4. Be careful about your business information 
    Never give out information about your business for advertising purposes unless you know how it will be used and you can confirm you are dealing with your standard advertising supplier.
  5. Get it in writing 
    Never accept a business proposal over the phone. Always request the offer in writing and limit the number of people in your company who have the authority to approve purchases, or create a multi-level approval process.

Who to contact when you suspect fraud

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