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How to Prevent Fraud in Your Small Business Operations

Fraud poses a significant threat to businesses of all sizes, but for small businesses, the impact can be particularly devastating — and in fact, downright fatal.

In Occupational Fraud 2022: A Report to the Nations, the Association of Certified Fraud Examiners (ACFE) reported that U.S. businesses lose an average of 5% of their gross revenues to fraud. And small businesses took the biggest brunt of them all. Small businesses (those with fewer than 100 employees) sustained the highest median loss, at $150,000 — 9% higher than the median loss of $138,000 absorbed by the largest organizations (those with more than 10,000 employees).

More importantly, that’s a level of loss that could cripple or even collapse a small business.

“The biggest contributing factor is a lack of internal control,” says PNC Bank. “Smaller businesses are more likely to have fewer fraud prevention restrictions, controls, and processes in place.”

No business can fully insulate itself against the dangers of fraud, but with the right strategies in place, you can significantly reduce those risks within your operations.

Read on as we explore practical steps that small business owners can take to safeguard their enterprises against fraud.

9 Ways to Prevent Small Business Fraud

  1. Implement Internal Financial Controls: Implementing internal financial controls, such as requiring dual authorization for large transactions, conducting background checks on employees who handle sensitive financial information and limiting access to financial systems can help mitigate the risk of fraud within your organization.
  2. Segregate Duties: Allowing any single individual to have unchecked control over key processes opens your business up to fraud. But implementing a system of checks and balances by segregating duties, you can limit opportunities for fraud. For example, the person responsible for handling cash should not also be responsible for recording transactions in the accounting system.
  3. Monitor Financial Transactions: Stay vigilant by regularly monitoring financial transactions for any irregularities or suspicious activity. This could involve reviewing bank statements, reconciling accounts, and conducting periodic audits to ensure that all transactions are legitimate and properly documented. Also, consider the occasional random audit, which can disrupt the plans of employees who have figured out how to work around regular, predictable audits.
  4. Use Technology to Your Advantage: Leverage technology to enhance security and detect fraudulent activity more effectively. Implementing robust accounting software with built-in security features, using encryption to protect sensitive data and regularly updating your systems to patch security vulnerabilities can all help strengthen your defenses against fraud.
  5. Stay Informed and Adapt: Keep abreast of the latest fraud trends and tactics by staying informed through industry publications, attending workshops and seminars, and networking with other business owners. Fraudsters will always try to come up with new scams; adapting your fraud prevention strategies can keep you one step ahead of potential threats to your business.
  6. Monitor Employee Behavior: Keep an eye on employee behavior for any signs of financial distress or sudden changes in lifestyle that could indicate potential involvement in fraudulent activities. Importantly, providing support to employees facing personal or financial difficulties can help mitigate the risk of internal fraud.
  7. Invest in Training and Education: While employees can be a source of fraud, they can also be important allies in policing it. Educate your employees about the various forms of fraud and the importance of adhering to company policies and procedures. Training sessions can help raise awareness about potential red flags and empower employees to identify and report suspicious activity.
  8. Encourage Whistleblowing: Create a culture where employees feel comfortable reporting suspected fraud without fear of retaliation. One way to do that: Establish an anonymous reporting system and ensure employees that all reports will be taken seriously and investigated promptly.
  9. Build Strong Vendor Relationships: Establishing strong relationships with your business vendors can also help prevent fraud. Verify the legitimacy of new vendors before doing business with them, regularly review vendor invoices for accuracy, and communicate openly to address any concerns or discrepancies.

Need Help Fighting Fraud?

Again, no business can ever be completely immune to fraud. But taking proactive steps to prevent it can significantly reduce your risks.

Whether you’re looking to prevent fraud or deal with fraud that has already happened, we can help.

McManamon & Co. provides both fraud deterrence and investigation services to small and midsize businesses. We provide fraud risk assessments, where we analyze your operations to identify risk areas so they can be better managed and mitigated. We also provide assistance with the design and implementation of fraud deterrence systems.  And if you’re already facing a fraud or corruption situation, our fraud examiners and forensics accountants can uncover the facts and get to the root of the problem.

Let us help you bolster your defenses. Call us at 440.892.8900 or contact us online today.

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