Small businesses specifically are highly vulnerable and susceptible to business fraud. This can be so harmful because of all the time, money, and work that people put into their small businesses. This first step in preventing business fraud is to know what to look for, so below are the five most common types of fraud in businesses along with how to recognize and avoid them.
Fraud can plague any business — organizations report losing 5 percent of their annual revenue to fraud. But small businesses exhibit specific vulnerabilities. For starters, they often lack the resources to sufficiently implement internal checks and balances for their accounting systems. Additionally, those performing the accounting duties are likely assigned multiple tasks that may or may not fall within their expertise. Finally, despite cultivating a culture of trust inside the business, the likelihood of internal fraud is just as high among long-term employees as with contract workers.
This makes sense when you consider that small businesses are powered by passionate owners who invest so much of their time and energy into pursuing their dreams. They work hard, but their focus can be pulled in a thousand different directions during any moment of the day. When they experience the thrills of success and growth, they also have to be prepared to face increased challenges, such as monitoring cash flow.
For these reasons, successful small business owners must maintain a high degree of crucial oversight over their financial affairs. They have to equip themselves to identify and act on five of the most common fraudulent practices and scams that can prey on them.
1. Payroll fraud.
Payroll fraud occurs in 27 percent of all businesses and twice as frequently in small businesses (fewer than 100 employees) than larger ones. Owners must gain a working knowledge of the payroll system and enforce accountability among bookkeepers in their monthly reports. Since payroll complexities significantly increase as a company grows, especially if overtime is a factor, owners have to maintain consistent scrutiny.
2. Cash theft.
Cash has a funny way of disappearing in a small business. Whether through skimming (when an employee takes cash that hasn’t been reported into the accounting system), larceny (when an employee takes cash that has been reported) or fraudulent disbursement (when an employee releases funds that haven’t been authorized by the owner), cash theft creates a negatively cumulative impact on the bottom line. From the outset of setting up a business, an owner needs a streamlined cash monitoring process, both for an effective financial process and also to maintain essential supervision of cash within the business.
3. Online banking.
The increased popularity of online banking has also increased the likelihood that funds could be transferred to erroneous accounts. Owners should schedule regular meetings with the accounts team to monitor all transferred money. Cybercrime has never been more sophisticated, and small business owners need to arm themselves with updated information on threats to respond accordingly with their relevant financial institutions.
4. False invoicing.
Business owners must have basic oversight over every vendor in their business because false invoicing is an increasingly popular fraud method. It often strikes when an employee creates false suppliers or when he pays a legitimate supplier and diverts the cash into an alternative account.
5. Invoice email.
This scam often involves perpetrators who pose as legitimate suppliers and advise changes to existing payment arrangements. The fraud may not be detected until it’s too late — when the business is alerted by complaints from suppliers that payments were not received. Regular account check-ins can help guard against business owners falling victim to this type of fraud.
Small businesses that have reported fraud suffered a median loss of $150,000. That kind of hit can break a business. While successful owners must surround themselves with an exceptional team, they also need to firmly control their financial processes. The trap that many owners fall into is over-relying on delegation, particularly during periods of expansion. When owners are too hands-off with business financials, the potential for fraud and detrimental loss rises.