How to Prevent Business Fraud

Fraud affects American business in companies of every size every year. The median loss per incident to small businesses is $98,000 and can range into the millions for large businesses, according to the Association of Certified Fraud Examiners. Preventing fraud requires attention to the work environment, control systems and specific anti-fraud procedures. The three most common conditions where fraud occurs are when there is the perception that it won’t be caught, the opportunity to commit fraud, and the rationalization that the company “owes” the perpetrator more than she is getting in compensation. Here’s how to prevent business fraud.

Instructions

1. Start by creating a work environment that defines and reinforces anti-fraud behavior. Owners and senior managers lead the way by communicating clearly that the company is committed to always doing the right thing with employees, customers and vendors, even if it means a higher cost to the company. If the leaders cut corners or shade the truth, there is no reason to believe those who follow will behave differently.

2. Establish clear written policies for all procedures and processes. Include an Ethics Policy that specifies how the company defines fraud and the actions management will take when it is discovered. Make sure all employees have a copy of the policies so no one can claim ignorance later. Then, enforce the policies fairly and consistently.

3. Make a background check a routine part of the hiring process for all employees. Check vendors’ dealings with other companies before approving them. Ask for references and check them.

4. Set up a system of internal controls. Segregate duties such as making deposits and reconciling bank statements, approving and paying invoices, authorizing and signing checks, keeping payroll records and writing payroll checks, and receiving payments and posting them to accounts receivable. In smaller companies with few employees, the owner may have to perform some of these duties himself. Monitor the controls and their effectiveness regularly and have an outside CPA review them annually. Make unannounced spot checks periodically.

5. Increase the perception of detection. The single most effective way to prevent fraud is to make it clear that it will not go undetected. Cross train employees to cover vacations and illness, and make all the internal controls visible. Enforce vacations. When people know someone is watching or will be following up on their work, they are more likely to follow policies consistently and less likely to try to bypass them.

6. Guard the physical custody of bank accounts, petty cash, marketable securities, and blank checks. Take inventory regularly and spot check randomly.

7. Consider establishing programs to help employees under outside pressures. If employees know they can get help with issues like substance abuse, marital and financial problems, they are less likely to look for ways to steal from the company to solve their problems.

Tips & Warnings

• Talk to customers regularly and ask them if they feel they are receiving fair treatment. Investigate all complaints. Customers aren’t always right, but making them feel they and their concerns are important enough to listen to may solve small problems before they become bigger and also builds customer loyalty.