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Protect Your Small Business: 10 Steps to Reduce Your Risk of Fraud

January 29, 2024

As a small business owner, you’ve poured your heart and soul into building your dream. You’ve invested countless hours and resources to make it a success.

But did you know that small businesses like yours are vulnerable to fraud? In fact, according to the Report to the Nations 2020 Global Study on Occupational Fraud and Abuse, small businesses typically lose an average of five percent of their gross revenues to fraudulent activities.

When you apply that percentage to the average small business, it translates to a median loss of $125,000—and that’s just an average; many businesses lose even more. Even more alarming, nearly 60 percent of fraud losses are never recovered. These numbers aren’t intended to scare you, but rather, to show you how critical it is to protect your business from fraud.

In this article, we’ll explore the top five most common types of fraud that occur in small businesses and show you some motives to watch for. Most importantly, we’ll share 10 actions you can take to drastically improve your organization’s internal controls—your best first line of defense against would-be fraudsters.

Common Culprits: The Top Five Frauds Seen in Small Businesses
  1. Check Tampering: This fraud involves manipulating checks by either creating fake payees or altering payee names. It’s a devious way for fraudsters to divert funds meant for your business into their pockets.
  2. Revenue Skimming: Fraudsters engage in revenue skimming when they accept cash payments without providing a receipt. This enables them to siphon off funds without leaving a trace.
  3. Fake Invoicing: This scheme involves creating false invoices for products or services that were never purchased. In some cases, a fraudster’s friends or family members may over- charge for services or products, funneling the excess money to themselves.
  4. Payroll Fraud: Manipulating the payroll process is a common fraud tactic. This can include falsifying hours worked, altering salaries, creating fake sales orders for commission payments or making unauthorized changes to direct deposit account numbers.
  5. Online Phishing Fraud: While this form of fraud primarily targets consumers, businesses can fall victim to it as well. Scammers send requests that appear to be from a reputable source, tricking employees into divulging personal identifying information that can be used to open new accounts under the name of the employee or business, or access existing ones.
The Fraud Triangle: Understanding the Motivations

Fraud doesn’t happen in a vacuum. Underlying motivations and opportunities usually make it possible. Understanding the fraud triangle can help you better comprehend why fraud occurs and, subsequently, take steps to prevent it.

  • Incentive or Pressure: This can be a financial incentive, such as [promise of] a sales bonus, or pressure to relieve a personal financial burden, perhaps caused by excessive debt.
  • Opportunities: Fraudsters take advantage of weak internal controls or find ways to override them, exploiting vulnerabilities in your business processes.
  • Attitude or Rationalization: Many fraudsters rationalize their actions because they think the company doesn’t pay them what they’re worth and, as such, believe they’re entitled to more.
Mitigating Fraud Risks: Implementing Internal Controls

Preventing fraud in your small business is crucial to protecting your hard-earned assets. Implementing strong internal controls is your first line of defense. Here are some key steps you can take:

  1. Separate Duties: If possible, separate duties among employees to ensure no one person has sole control over a financial process. These duties should include authorization, recording and custody of assets.
  2. Monthly Bank Statement Review: Scrutinize your business bank statements in detail each month. Ensure that the person responsible for bank reconciliation doesn’t have access to the bank account.
  3. Review Outgoing Payments: Keep an eye out for duplicate invoices, new vendors or multiple invoices from the same vendor in a short period of time. Require two people to sign off on new vendors and verify the validity of both the vendor and invoice.
  4. Cash Transactions: For cash transactions, require two individuals to authorize disbursements of petty cash. Limit the amount of physical cash kept in your business, and double-count cash deposits while tracking beginning and ending drawer balances.
  5. Inventory Control Systems: Implement a three-way matching process, comparing the purchase order, invoice and goods receipts to ensure all three match before approving the invoice. Regularly inspect and count incoming inventory to confirm accurate order fulfillment.
  6. HR Controls: Conduct background checks, require approval for all new employees added to the payroll and regularly review payroll reports for unusual amounts or unfamiliar names. For changes in employee direct deposit accounts, conduct verbal verifications or require signatures.
  7. Cash Flow Projections: Create monthly cash flow projections or regularly review actual-versus-budget results. Investigate discrepancies if actual cash flow falls short of projections.
  8. Establish and Communicate Policies: Implement policies that require receipts for expenses, set thresholds for expense approval and define limits for lavish expenses. Require employees to take annual vacations and ensure someone else handles their duties while they’re away.
  9. Standard Operating Procedures (SOP): Develop and regularly update a SOP document. This should outline the steps, responsibilities, workflow and timing for routine trans- actions, both streamlining operations and reducing the risk of errors and mistakes.
  10. Data and Access Security: Review online credentials for appropriate access levels. Implement multifactor authorization for banking portals and require multiple signers for transactions exceeding a specific threshold. For data security, ensure unique passwords and conduct regular system backups.
Take Action to Protect Your Business!

Now that you’re aware of the risks and armed with strategies to mitigate fraud, it’s time to take action. Don’t wait until it’s too late. Protect your small business by implementing these internal controls and staying vigilant. Your hard-earned success deserves to be safeguarded from the threat of fraud.

If you need assistance or have questions about securing your small business against fraud, we’re here to help. Contact us today for a consultation, and we’ll work together to ensure the security and prosperity of your business.

Don’t let fraud put your dreams at risk. Start protecting your business today!


By Roxanne Dudicz; originally published in SBAM’s January/February 2024 issue of FOCUS magazine

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