When you think of business fraud (occupational fraud, employee fraud or internal fraud), you likely think of 50-story office buildings, world-wide companies and cases that are big enough to make the news, like the Enron Ponzi scheme of 2002 or the Lehman Brothers scandal in 2008. Business fraud, however, is not limited to billion-dollar empires, big names and splashy news stories. In fact, business fraud actually occurs much more frequently and more often inside much smaller businesses.
Business fraud tends to happen in a quieter arena with fewer employees and smaller available bank balances. It occurs when small businesses cannot afford enough employees to separate duties and when business owners are too busy to carefully audit accounts. It happens when business owners least expect it: when they are relying on trusted employees.
Get the Facts about Business Fraud
Many small business owners do not believe their businesses can or will fall victim to occupational fraud. Due to this belief and budget restrictions, many small businesses do not have proper controls in place, which leaves them vulnerable to would-be fraudsters.
If you are trying to figure out if your business is at risk, consider the following facts from this 2018 Global Study on Occupational Fraud and Abuse from the Association of Certified Fraud Examiners (ACFE).
The smallest businesses (those with the fewest number of employees) were at the greatest risk of occupational fraud and also suffered the greatest monetary losses.
Small businesses with fewer than 100 employees incurred median losses of $200,000 due to fraud, just about double the average $104,000 fraudsters stole from businesses with more than 100 employees.
Even though they mostly attract employees with good intentions, but NonProfits aren't immune to fraud. NonProfits incurred median fraud-related losses of $75,000.
Of these businesses that fell victim to internal fraud, 53% recovered nothing and 42% never even reported incidents to law enforcement (likely due to worries about bad publicity paired with the high cost and narrow chance of recovering anything).
On average, internal fraudsters were not detected for 16 months, which means most of the stolen assets were long-gone by the time a business owner realized they were missing.
Trusted employees commit fraud. 96% were first-time offenders. Loyalty sometimes means loyalty, but sometimes it translates to greater risk. The longer an employee was with a company, the more he or she took. Fraudsters who worked with a company for less than five years took $100,000 on average, while employees who had been with a company for longer than five years stole $200,000 on average.
90% of fraud was asset misappropriation (theft), and 85% of the time the misappropriated asset was cash.
Most often, fraud was committed by individuals in a business's internal accounting department.
The top three most commonly used methods of stealing cash through internal fraud were: 1. Bill Payment Fraud (80%); 2. Payroll Fraud; 3. Expense Reimbursement Fraud.
Businesses that implemented monitoring systems to raise red flags experienced 52% fewer losses and 58% faster fraud detection than businesses with no monitoring systems in place.
Of all detected thieves, 40% were caught by tip, 15% by internal audit and 13% during a management review.
The ACFE study showed that the most effective way to catch thieves was with an anonymous tip hotline. Businesses with a hotline detected 46% of fraud occurrences by tip. Without a hotline, businesses only detected 30% of fraud by tip.
Organizations with hotlines experienced 50% smaller losses than those without hotlines.
Top Ways to Prevent Business Fraud
1. Establish an Anonymous Tip Line
Provide a phone hotline or a designated email address (with the guarantee of anonymity) for employees to report suspicious behavior. Have that hotline go right to the top.
2. Separate Duties
Divide critical duties into separate bookkeeping and accounting functions. For example, to prevent bill payment fraud, the individual who opens the mail should be different from the person who enters the payments, who should be different from the individual approving payments. Use a bill payment app like bill.com to make is simple to separate those duties.
3. Always Use Internal Controls
Of course, you trust the individuals you hire, but that doesn't mean you should stop protecting your business with internal controls. Never build a system that’s based only on trust! Trusted employees can encounter situations which lead them to compromise their ethics. They can also make honest mistakes, which internal controls will detect. Fraud prevention policies and procedures prevent loss due to both intentional fraud and human error.
4. Know Your Employees
Pay attention to employee behavior and the things that are happening in their lives. Concern for employees will not only build your relationship with them and improve their working environment, it will also tip you off to erratic or unusual behavior, signs of drug abuse or financial problems — all of which could signify a potential future fraud problem.
5. Audit Payables
A person who is not responsible for making or sending payments should be responsible for auditing payable accounts and reconciling these bank statements. Without these internal controls in place, bill payment fraud is much too easy to commit.
6. Track Expense Reimbursement
Always require a receipt and, if possible, switch reimbursement procedures to a completely electronic system such as Expensify™. This will prevent double payments, ensure receipt records are scanned and kept for every expense and ensure the proper eyes are on the appropriate reimbursement requests.
7. Outsource Payroll
Keeping payroll in-house provides too many opportunities for payroll fraud. You should always be suspicious of a bookkeeper who refuses to relinquish payroll responsibilities to an outsourced provider. Outsourcing payroll is not only safer, it's also usually less expensive than doing it yourself.
8. Assign Separate Logins
Every employee who needs to access your electronic bookkeeping and accounting software and systems should have a unique login ID and their own password. This will allow you to track and control who accesses which systems and at what times. In the event of employee fraud, this information will be incredibly useful in apprehending a fraudster.
9. Eliminate Cash
If your company accepts and deals with cash, then your business is at risk of skimming fraud. Reduce cash payment acceptance or restrict the employees who are allowed to handle cash.
10. Provide Written Policies and Procedures and Verify Receipt with Signature
Even if your business takes necessary precautions and preventative measures, fraud can still occur. In the event your business does fall victim to fraud, you will need to show the police department evidence of written policies and procedures and proof your employee received a copy of this information.
Be sure you have a written employee handbook that clearly states employees are not allowed to use company assets for personal gain. Collect employee signatures upon receipt of this handbook. Without this, you will have a much lower chance of recovering stolen assets.
Affordable Outsourcing with a Reliable Partner
Outsourced accounting can reduce your business's risk of fraud across a spectrum of exposure points. At GrowthForce, we thoroughly vet all of our employees before making them a part of our team. In addition, our client’s teams of bookkeeping and accounting professionals provide built-in checks and balances. We also help our clients establish safe, sound bookkeeping and accounting systems, outfitted with robust technology and tools for seamless implementation.