Fighting fraud as a small business owner
While we don’t hear this everyday, we have heard it enough that we thought it was worth writing about. The story always goes something like this - “That person was with me for years and I completely trusted them and then found out they were stealing from me. “
Why does this happen?
When talking about fraud, one thing that is commonly referenced is the fraud “triangle”. The fraud triangle represents the three elements that are behind an individual’s decision to commit fraud. Those elements are 1) Opportunity, 2) Incentive and 3) Rationalization.
Opportunity
This is a big one that we find in many small businesses. By their size, it is sometimes difficult to have duties separated to different people in the office which could create a natural barrier to fraud. So, what ends up happening is a trusted bookkeeper manages the accounting system, pays the bills, takes deposits to the bank, and then reconciles the bank account. What could go wrong with that picture?
A lot could go wrong with that picture. We have seen fake vendors being paid, payroll tax deposit money being diverted for personal use, cash being skimmed from deposits, employees giving themselves raises, and the list goes on.
When one person has uncontrolled and in many cases unsupervised access to these functions, that creates an opportunity for fraud.
Incentives
This one is a little less obvious sometimes. Let’s face it, money is a nice thing to have and life is expensive. There are a lot of reasons behind why someone might start taking money from their employer. Excessive consumption may have created debt that is difficult to pay off, or there could be certain addictions creating the need for more cash such as gambling or drugs. Sometimes the source of the incentive is not the fault of the fraudster. For example, their spouse could have lost their job or there were high medical expenses due to an illness. The list of incentives is long and in most cases, is totally out of control of the small business owner.
Rationalization
Rationalization refers to the justification felt by the fraudster for the acts that they commit. Sometimes the fraudster might feel they are underpaid. Another form of rationalization might be that what they are taking is small compared to the businesses overall assets and it won’t really hurt the owners. An employee could be disgruntled and feel that they are mistreated by their owner boss. Sometimes the rationalization has nothing to do with the business and may come in the form of the fraudster feeling hopeless and without any other options.
The cost of all of this fraud to small business owners
According to the 2022 study released by the Association of Certified Fraud Examiners, the median loss for small businesses with less than 100 employees was a whopping $150,000! That is not an error. The average fraud goes on for 14 months before being discovered. What is not counted is the emotional toll it takes on the owner. Not only do they feel emotionally violated, but then they have to take time away from managing their business to pursuing legal and criminal action against the perpetrator.
How do I fight fraud?
For the small business owner, one thing that is generally not possible is hiring a bunch of different people to segregate their duties. The most powerful thing that a small business owner can do is practice some review of the records including reviewing:
- Bank statements and reconciliations
- Checks written
- Vendor lists (and new vendors created)
- Deposits made
- Adjustments to accounts receivable made
- Reviewing up to date financial statements on a timely basis
The actions above can help detect fraud as well as prevent someone from committing fraud if they know someone is watching.
Another thing for business owners to consider is performing background and/or credit checks prior to employment. We would encourage you to consult your attorney to ensure compliance with the laws of your state.
One final thought that may be more difficult for the smallest of businesses is job rotation or mandatory leave. If a fraudster is covering up their deeds on a continuous basis, it may be brought to light quickly if they cannot control their actions for a period of time.
What about outsourcing our accounting function?
Having an outsourced accounting function is another tool in the small business owner’s toolkit. You may have a bookkeeper or office manager that writes checks and makes deposits and then the financial reconciliation is left to an outside accounting firm. Does that feel safer to you? If you have concerns about fraud occurring in your small business, feel free to schedule a call and talk to us about how outsourcing certain functions can be a very wise investment.
We have helped many small business owners in Greer and Greenville lower their risk of fraud by taking the steps mentioned above and would love to see if we can help you too!