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Identifying and Preventing Fraud in Your Small Business


It starts with motivation, moves to rationalization, and culminates with opportunity. That’s the cycle most employees who commit workplace fraud go through, stated Ross Dietrich, managing partner at Price Kong & Co., CPAs, during his informative presentation on Fraud Prevention at Republic Bank of Arizona’s virtual ShopTalk event in April.

It’s difficult to do anything about the motive since it is typically related to a personal issue, such as drug use, divorce, medical bills, or other dire circumstances. You may not be aware that an employee is having a crisis. And, not everyone in those situations will commit fraud, but it does increase the potential if the employee is able to rationalize it and sees opportunity.

There are a few things you can do to combat rationalization, said Dietrich, such as paying employees fairly, instilling ethical business practices, and being present. Those steps will deflate an employee’s rationalization that you deserve to be defrauded because you’re cheap, a bad person, or never around.

According to Dietrich, the best way to prevent workplace fraud is to eliminate the opportunity. Below are his 15 tips for controlling risk:

  1. Set the expectation for your team and lead by example. If you cheat your customers or exhibit unethical business practices, your employees may do the same.
  2. Establish and maintain a written Fraud Policy. Outline what constitutes fraud and the associated consequences, such as discipline, termination, and prosecution.
  3. Set-up a fraud hotline. Most fraud incidents are uncovered by employees. They may wish to turn the perpetrator in, but do so anonymously. There are numerous hotline services, some of which are inexpensive or free.
  4. MANDATORY vacations for all. Fraud is often uncovered when the perpetrator is not in the office to cover his/her tracks. Every position should have a trained back-up.
  5. Perform background checks on all employees. General background checks are an important part of minimizing risk. In addition, credit and criminal histories should be pulled on all employees with financial responsibilities. These small costs could save your business thousands of dollars in losses.
  6. Ensure bank statements are sent to, and reviewed by, the owner(s). Bank statements can be easily falsified to cover fraud. Whether by snail mail or email, statements should be sent to your personal addresses and reviewed carefully.
  7. NEVER sign a blank check. Doing so is an open invitation for an employee to commit fraud.
  8. Maintain accurate and timely financial statements. They are key to understanding whether everything is above board or whether there are irregularities.
  9. Request supporting documentation for all payment and reimbursement requests. Invoices and receipts need to accompany written requests for payment. Do not blindly sign checks without understanding what they are for and confirming the dollar amount matches the documentation.
  10. Always ASK QUESTIONS about everything, especially anything you deem as suspicious. Keep asking questions until you are satisfied with the answers. This will demonstrate that you paying attention.
  11. Conduct SURPRISE inspections and observations. Even if you don’t find any wrong doing, it will send a message that you are on top of things.
  12. Limit or ELIMINATE debit and credit card use by employees. Be very selective with who has access to company credit cards and have processes in place for tracking and documenting expenses. Never provide an employee with a debit card connected to the company’s bank account.
  13. Document and TAKE APPROPRIATE ACTION against perpetrators of fraud. Depending on your policies and the fraudulent event, be sure the punishment fits the crime, whether it be discipline, termination, or even prosecution. This is particularly important for crimes like embezzlement to help prevent the perpetrator from doing the same at another company.
  14. Segregate duties to limit fraud. No one individual should have total control. Segregating duties makes it harder for fraud to take place or go undetected.
  15. Establish a routine to review the Quick Books audit trail report. This will allow you to look for suspicious activity and ask questions. You can also look for ghost employees, employees who are giving themselves raises, and other fraudulent activity.

Fraud has become a serious problem for small businesses. Given today’s economy, small businesses are even more at risk. Implementing these steps will play a significant role in reducing your exposure to workplace fraud.