Jun 15, 2011

Prevent Financial Fraud in Your Business

[caption id="attachment_393" align="alignright" width="300" caption="Prevent financial fraud"]

[/caption] The average organization’s annual revenue loss due to fraud is 5 percent, according to estimates by survey participants in the “2010 Report to the Nations.”¹ The report, released by the Association of Certified Fraud Examiners, also showed that small organizations are more likely to be hit by occupational fraud—from within the company—because they generally don’t have antifraud procedures in place. As a small-business owner, you can take steps to minimize the likelihood of fraudulent activity in your company by implementing a fraud-prevention system. Inventory fraud, check fraud, and commercial bribery are popular types of fraud that can plague small businesses if the proper checks and balances aren’t in place. Inventory fraud occurs when employees steal from their employers’ inventories. Check fraud typically occurs when employees write illicit checks to themselves or other people. Commercial bribery typically occurs when employees sell company merchandise to third parties, taking a split of the profits earned from reselling the merchandise. Those who carry out business fraud are typically internal employees—they already have inside access to various accounts and merchandise. Don’t be surprised if the guilty party is a longstanding, loyal employee. Business fraud usually happens “one piece at a time,” just like the Johnny Cash song.² An employee who is stealing money has probably been doing so over time, accumulating it little by little. Stealing a huge chunk of money at once may be too difficult. Even if you think you have the best employees in the world, you need to be proactive about preventing fraud. Here are some tips: Run background checks. Verify what the employees say about themselves. Depending on the size of your business and the nature of the job, you may find extensive background checks to be impractical and unnecessary. But, at minimum, you want to run a criminal background check—no matter what. Run credit checks. Just because someone has bad credit, he isn’t necessarily going to steal from you. But, at minimum, you have a heads up on any financial problems your employee might be dealing with. It’s just something to keep in mind. Verify résumés. If a job candidate said he said he went to a particular college or received a particular degree or qualification, verify it. If he lied on his résumé, what else might he lie about? You can also tell job candidates that you’re going to conduct background checks as a condition of their employment. Any candidates who have lied might voluntarily go away. Also, if you're implementing a new system in your business, conduct background checks on your current employees—even those who are longstanding and loyal. Don’t be fooled by their loyalty. Next, implement business audits and check your records annually. Finally, implement a whistleblower hotline. If an employee sees or knows about another employee engaging in fraudulent activity, he'll have the opportunity to report that activity anonymously to management. Management can then deal with it the situation. Business fraud is an area of concern for small businesses. Employers often do not fully know the people they entrust to govern their coffers of money and information. Business owners who implement fraud-prevention procedures could save significant amounts of money. How about you? Has fraud hit your business? If so, how did you deal with it? Tell us in the comments below. For more information, visit: 1. Association of Certified Fraud Examiners’ “2010 Report to the Nations” 2. “One Piece at a Time” by Johnny Cash