Small Business Fraud: Prevention Better than Cure

Fraud cases in small businesses are rampant and cause immense loss. Businesses that are small suffer from a lack of fraud awareness and inadequate internal checks. The absence of segregation in the performance of duties like accounting, authorization and physical safeguarding of assets, makes a small business prone to fraud.

Small business fraud cases often go unnoticed. However, the fact remains that they are more vulnerable to fraudulent activity and according to the small business fraud statistics, the loss due to small business fraud cases in the US alone is $400 billion each year.

The above pie chart illustrates how 85% employees of small business firms would commit fraud under certain circumstances like a need, an opportunity and rationalization of fraudulent behaviour. Only 10% of employees would not commit fraud under any circumstance and the remaining 5% would commit fraud irrespective of the circumstances. (According to the Report on Occupational Fraud and Abuse)
The most common types of fraudulent activities striking a small business firm relate to misappropriation of assets that include;

• Skimming cash before it reaches the company’s accounting system
• Alteration of cash receipts to remove funds from the organization
  
• Processing refunds for merchandise not returned
  
• Processing discounts on merchandise without authorization or when not appropriate
  
• Issuance of fictitious sales credits to divert cash receipts
  
• Theft of inventory
  
• Theft of office supplies
  
• Fictitious invoicing
  
• Theft of fixed assets such as laptop computers and printers

Given the above cases of fraud in small businesses, you must be wondering whether at all businesses of such nature can be saved from fraudulent activity. Well, the answer lies in spreading the word of fraud awareness to its employees and taking every precautionary step for its prevention.

Here are a few small business fraud prevention techniques to help safeguard your company from foul play;

• Be Aware and Vigilant of fraudulent activity. Fraud Awareness can be easily obtained by attending seminars on detection and prevention of fraud like those organized by Association of Certified Fraud Examiners and state associations of Certified Public Accountants. One should also get a copy of ACFE’s Small Business Fraud Prevention Manual. This is a very handy reference book for all internal and external schemes used by customers, clients and employees to defraud a company and methods for preventing the same.

The Small Business Fraud Prevention Manual covers areas the following areas;

• Secondly, the company’s balance sheets should be checked regularly and a comparison with the previous month’s records, would help detect any irregularities in the transactions
  
• Finally, setting segregation of functions with adequate checks and balances. No one person should be made in charge of the authorization, record keeping and physical safeguarding of the same assets.

The above measures would go a long way in safeguarding your company from fraud. Always remember the age old popular saying, ‘Prevention is better than cure’. It holds true in every situation.