3 High-Risk Fraud Areas in Your Small Business

Natalia Autenrieth In her professional lives across the United States, Natalia Autenrieth, CPA has audited Fortune 500 clients as part of a Big 4 team, built an accounting department as a controller of a large hospital, and served as a CPA consultant to municipalities. Today, Natalia coaches in the financial industry and writes about business finance, financial technology, and personal money management. Her ghost-written articles have appeared in thought leadership and expert blogs, as well as Kiplinger and Accounting Today. Read more about Natalia and her practice at www.AutenriethAdvantage.com.

3 High-Risk Fraud Areas in Your Small Business

A small business can feel like a family. People get to know each other really well. Some employees on your staff can become fast friends.

Why would this ever be a bad thing?

Camaraderie of a close-knit group can hide fraud.

Fraud can happen at a business of any size. Small businesses are in a high-risk group because of their “all hands on deck” philosophy – and the lack of segregation of duties and poor oversight that can often result from it.

Which types of fraud should you watch out for as a small business owner?

Payroll fraud

A trusted employee could cut payroll checks to him- or herself, either directly or by creating a “ghost” employee profile. Payroll fraud could take other forms, as well: inflating time reports or submitting fake expense reimbursement requests are just two examples. In order to prevent payroll fraud, small business owners should take care to create a system of checks and balances. Even in a small group, it is important to separate the duties of originating, recording, and reconciling transactions. Don’t allow the same person to make a hiring decision, set up the new employee on the payroll system, and make payments.

Cash theft

Cash is one of the easiest assets to steal. One scheme has an employee accepting a cash payment at the register, never entering the sales transaction, and then pocketing the money. The business owner wouldn’t know the cash is missing because there is no matching sale transaction to trigger the inquiry. An employee could also steal cash from the register against properly recorded transactions, enter a partial sale and pocket the difference, or process a fake “return” and keep the money.

Video surveillance, supervision, and periodic surprise inventory audits can be an effective deterrent for cash theft. Remember that the best practice is to deposit all cash to the bank at the end of each day. Stacks of cash laying around unsecured can be all the temptation someone needs to help themselves!

Fake invoicing

An employee might set up a fake “supplier” or “contractor” record on the books, create fictitious invoices, issue payments, and pocket the checks. The best way to avoid this is by separating the functions of approving a new supplier or contractor, setting up the record in the system, and making invoice payments. You may also consider requiring a supervisor’s or your own signature on checks over a certain amount.

Small business fraud risks – and your plan to combat them

A small business owner must invest in proper oversight of critical functions.

This is tough advice because a small business owner’s attention is pulled in a thousand directions already. It’s comforting to delegate a task and forget about it, but the cost to your business could be devastating. Some things, like proper supervision and surprise audits, cannot be delegated – no matter how much you might trust someone to have your best interests at heart.

And if you think that your employees ate immune to fraud and this could never happen to you, think again. Fraud can be a manifestation of external or internal pressures – and even the most good-hearted individual can fall victim to it. So, stay vigilant. Invest in building proper workflows, look at your business processes with an eye for seeing risk exposure, and vet your employees thoroughly before you hire.