R&K Blog
In a previous post, we discussed employee dishonesty and how employee theft can occur at any business. Small businesses are especially vulnerable. According to the Association of Certified Fraud Examiners (ACFE) 2018 Report to Nations, small businesses lost twice as much per scheme to fraud as businesses with 100+ employees. Why? The ACFE attributes this to having fewer resources to prevent and recover from fraud. Having fewer anti-fraud controls in place can make a business more vulnerable.
Based on our experience, we see that good controls are sorely lacking, even at some large and otherwise sophisticated organizations. We’ve established that having insurance coverage is essential to protect your business, but we wanted to provide a few small business tips for organizations to help prevent fraud.
1. Create a code of conduct.
The ACFE says that codes of conduct are one of the most common anti-fraud controls, and that having one was shown to reduce fraud by about 56%. Take it a step further and make sure your code of conduct has a fraud policy. This will define acceptable vs. nonacceptable behavior, tell employees who to go to or how to report fraud and establish a process for taking action against fraud. The International Risk Management Institute, Inc. (IRMI) provides a great checklist for creating a strong fraud policy.
2. Train your employees.
In addition to having your employees sign a code of conduct, it is a great idea to provide fraud training… and make sure it is ongoing and reinforced. The goal should be to make sure employees know what fraud is, how it affects the company and everyone in it, where to go to report fraud and promote a zero-tolerance policy.
3. Set up an anonymous reporting system.
The ACFE’s report says that tips are the most common fraud detection method; over 53% of all fraud tips were provided by members of victim organizations and 32% from outside of them. Many whistleblowers may be afraid to report something due to retaliation. Setting up an anonymous reporting system makes it easier for employees to share information.
4. Don’t leave all of the accounting functions up to one person.
Checks and balances – do not leave all accounting functions up to one person. Many small businesses make this mistake. This makes it easier for fraud to go undetected, as was the case with Company X in our previous blog post. We suggest having multi-person signoffs for accounting or payroll functions.
5. Regularly check your business back accounts.
This may seem like an obvious one, but it needs to be emphasized. If employees know you are reviewing bank accounts, they are less likely to commit fraud. Monitoring your accounts will help mitigate risks for billing schemes, check and payment tampering schemes, expense reimbursement schemes, skimming, cash-on-hand misappropriation, financial statement fraud, cash larceny payment and noncash misappropriations – all common risks for small businesses.
6. Conduct frequent audits and use audit logs to trail all financial transactions.
Tell your employees that you are going to audit, but don’t tell them when. Surprise audits reduce fraud by about 51%. Conduct audits for accounting and bookkeeping functions, cash, inventory management and refunds and product returns.
Prevention is a great way to protect your business, but having insurance is the best way to help your business avoid major losses due to fraud or embezzlement. To get in touch about business insurance, please click here or contact us at 800-242-2433. Coverage for your business is readily available and affordable.