No fraud prevention strategy is completely foolproof, and despite having great strategies in place, businesses can still fall victim to fraud. As a bookkeeper, it breaks my heart when I encounter a business owner who has been a victim of fraud. In fact, about one in ten clients I’ve worked with have experienced fraud.
Fraud remains a significant concern for businesses of all sizes, according to PwC’s 2022 Global Economic Crime and Fraud Survey, which found that nearly half of surveyed organizations had encountered fraudulent activities within the past two years. Smaller businesses face heightened risk from internal fraud due to their often close-knit, trust-based cultures. To combat this threat, companies must implement and maintain control measures that protect against both internal and external sources of fraud. While some financial institutions manage to restore lost funds, there are unfortunate cases where clients never recover their money.
Fraud can occur both within and outside your business. Outside scams are generally more prevalent in terms of the number of incidents. This is partly because there are far more potential external threats than insiders in any organization. However, inside scams, while less frequent, often result in larger financial losses and can be more damaging to an organization’s reputation and internal structure.
Here are some strategies to help prevent fraud outside of your business:
Stay Current on Fraud Tactics
Stay informed about the different types of fraud attempts, including text scams, email phishing, impersonation scams, and malware. Regularly reading articles on these topics can help you recognize and avoid potential threats. The FTC’s scams webpage shares articles about the latest scams and offers advice to help you avoid, report, and recover from scams.
Vendor Verification Process
When setting up payments to new vendors, independently verify their details. For instance, I obtain tax forms, independently verify payment details, and contact the vendor through a phone number found separately, not just from the email they provided.
Bank and Credit Card Alerts
Set up alerts for transactions above a certain amount or when new vendors are added. This helps in quickly identifying unauthorized activities.
Now let’s talk about some strategies to help prevent fraud inside your business.
Ethical Leadership
Lead by example by demonstrating ethical behavior and integrity. If employees see that you take financial management seriously, they are less likely to take advantage of opportunities to commit fraud.
Password Management
Every user should have their own login credentials for any system containing financial information. Avoid sharing passwords and ensure each person has their own user ID, allowing you to track activities accurately. Using a password manager is crucial for maintaining secure and unique passwords.
Access Control
Grant the minimum level of access necessary for each person to perform their job. For example, if someone doesn’t need to move money, set them up as a view-only user on your bank account.
Segregate Duties
Ensure no single person has control over a financial transaction from start to finish. This segregation of duties helps prevent fraud, such as setting up fake vendors or misdirecting payments.
Authorization and Approval Levels
Set transaction limits for employees so they can only approve transactions up to a certain amount. This limits potential damage from fraudulent activities.
Regular Financial Reviews
Reconcile your bank and credit card statements monthly. Look for any unfamiliar transactions and follow up on them. I advise business owners to pick at least one transaction each month to investigate. This not only helps catch fraud early but also ensures your team knows you are vigilant.
Employee Communication
Encourage employees to report any suspicious activities without fear of retaliation. Creating a culture where employees feel safe to speak up is crucial for internal fraud prevention.
Background Checks
Conduct pre-employment screening and background checks on new employees, especially those handling sensitive financial information.
Regular Employee Vacations
Incorporate mandatory consecutive week vacations for your employees. This means they must take at least one whole week off (Monday through Friday) each year. This practice helps uncover any regular fraudulent activities that go unnoticed during their routine work.
Direct Bank Access
Regularly log in to your bank accounts instead of relying solely on employee reports. This direct oversight can help catch discrepancies early.
Fraud Prevention in Practice: A Real-Life Example
Fraud stories often serve as cautionary tales. For example, a bakery discovered fraud when their bookkeeper discovered that their cost of goods sold increased without a corresponding rise in revenue. It turns out an employee was using the bakery’s resources to produce and sell extra baked goods for personal gain.
Recently, I had a personal encounter with a potential fraudster. I received a message from an unknown person offering to pay me $5,000 for four hours to teach an actor to be a bookkeeper. This offer was suspiciously high compared to my usual rates. Curious and cautious, I investigated further by checking the email domain, researching the company, and finding discrepancies in their story. My suspicions were confirmed when I found online reports of similar scams. The scam likely involved paying me with a stolen credit card and requesting a refund in a different form, leaving me out of pocket. This experience reinforced the importance of vigilance and thorough vetting in preventing fraud.
By implementing these fraud prevention strategies, you can significantly reduce the risk of fraud in your business. Stay vigilant, educate your team, and foster an environment of transparency and accountability.
If you have any questions or need assistance with setting up fraud prevention measures, feel free to reach out.
