Fraud:It can happen to you

Do you know how to detect it or protect yourself? Most of us want to believe the best of people and therefore we are naive and believe it will never happen to us. When in reality, small and mid-size businesses are impacted at a much higher percentage than large corporations. Why? Smaller businesses tend to take fewer precautionary measures to prevent fraudulent behavior.From my experience, it is usually done by a family member, long time employee, or friend that’s been given too much freedom with too few controls. For most of us, it is an innate belief that we trust people unless they give us a reason not to. However, you must not be naive. You need to know that it is very much a reality that could happen in your business and you need to be aware of why it happens, how to identify if it is happening, and what to do if it has happened.

Why does fraud happen? Usually it is a mixture of three aspects that sets the stage:

1. Opportunity – an opportunity for fraudulent behavior is provided by the company unknowingly. Small businesses are more prone to these because of the lack of separation of duties.
2. Pressure – personal pressures can put people over the edge and cause them to be irrational in their thinking. They may have medical issues, financial issues, or a variety of other personal situations that are influencing their judgment.
3. Rationalization – the employee believes they can rationalize their behavior. They need the money more then the company, the company won’t ever notice, and a million other similar types of insidious thoughts.

To someone who commits fraud, they can rationalize their behavior in a variety of different ways and will go to extreme measures to cover their tracks. Small business owners believe it won’t happen to them as they often consider their employees like family. However, it is critical that you are able to keep a separation of thoughts between what happens at work and what happens outside the four walls of your business. No business is 100% safe.

What are five popular types of fraud?

1. Claiming additional payroll hours or falsifying an employee.
2. Stealing merchandise or cash.
3. Giving unauthorized discounts to friends and family.
4. Selling private business information to outsiders.
5. Exaggerating on expense reports

The biggest way to identify if it is happening in your business is to implement a control process that includes separation of duties. Here are a few easy to implement activities that can help identify and/or prevent fraud:

1. Payroll – hand deliver the paychecks. This will help identify if there are any “false” employees. A process for tracking hours will help to minimize extra hours appearing on anyone’s time card. This can be done by having a manager sign off on subordinate’s time sheets or by having a time
2. Theft of cash or merchandise – have controls in place that ensure separation of duties. Those who receive the money should be different than those who have done the invoicing and depositing. Same goes for inventory. There should be a checks and balances for purchase orders, receiving and invoicing.
3. Unauthorized discounts – have a sales system in place that tracks any time discounts are given. When you can retrieve a discount report, then you will be able to easily identify anything out of the ordinary variances.
4. Selling private information – this is a difficult one to protect. You should have everyone sign an agreement at the time of hire to notify them that they are going to be exposed to confidential information and what their responsibilities are and consequences should they disclose to outsiders. Computer systems and paper work should also be protected with passwords, lock and key and whatever other measures may be warranted to minimize unnecessary access.
5. Expense Reports – require receipts on ALL reports for reimbursement with no exceptions. Also establish guidelines so that if they fall outside those guidelines then they may risk not being reimbursed without prior approval.

Unfortunately all we can do is implement protective measures to the best of our ability. There is no 100% fool proof way to guarantee it won’t happen to us. However, you need to ensure you are assessing your risk and implementing separation of duties to try to minimize fraud in your company.

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