The Southbourne Tax Group: Fraud prevention tips for your small business clients

By: jaefomby


Your clients probably underestimate the risk of fraud

According to the world's largest anti-fraud organisation, the Association of Certified Fraud Examiners (ACFE), small and mid-sized businesses are the most common victims of organisational fraud. And the effects can be more damaging.

Small businesses report 31.8 percent of all instances of fraud – a higher rate than for larger businesses – and suffer greater losses in relation to their size. And more than half of all small businesses that suffer fraud don’t recover any losses.

The types of fraud that your clients need to be aware of fall into three categories:

• theft
• financial statement fraud
• asset misuse

ACFE says theft is the most common, including:

• stealing cash
• claiming fake expenses
• taking property

Employees are the main culprits, which can be tough for your small business clients to swallow. They often consider their employees as friends or members of an extended family.

What makes a business vulnerable to fraud?

There are many conditions that allow fraud to take hold:

• Employees perform multiple functions, allowing them to hide their actions.
• Staff become too familiar and trusting with each other.
• The absence of formal procedure means things don’t get recorded.
• Staff lack the expertise to recognise fraud.

It’s vital that small businesses take steps to deter fraud and detect it as soon as possible.

When you’re meeting with your small business clients, here are 10 important things to say:

1. “Don’t let one employee do all the accounting and bookkeeping”

Because of their size, many small businesses have one person that always handles bookkeeping functions like:

• client receivables
• processing client payments
• paying invoices
• managing petty cash
• recording functions in the accounting system

This makes it easy for cases of fraud to go unnoticed. Businesses should have at least two people handling these functions – with accounting and cash-handling separated. You might also suggest that your firm acts as a virtual CFO to provide extra oversight.

2. “Make sure you know your employees really well”

It might seem like an obvious fraud prevention tip, but you need to stress the importance of credit card security to your clients. They probably know they should be careful, yet they may still mix business and personal accounts when it’s convenient to do so. That can result in costly errors – such as tax fines or penalties.

Separating accounts also makes it easier to record business expenses. Encourage clients to protect credit card information and to use secure, online bill payment services wherever possible.

3. “Maintain robust internal controls and processes”

Small businesses often feel immune to fraud but you should encourage clients to introduce controls. They can detect (and help prevent) fraud by:

• restricting employee access to financial account data
• limiting access to inventory or stock
• establishing multi-person sign-off for:
- expense claims
- overtime
- cheque writing
- other accounting or payroll functions
• using audit logs or audit trails to track and trace all financial transactions

4. “Watch your business bank accounts like a hawk”

Of all the fraud prevention tips, this one’s become really easy to implement. Online banking makes it quick and painless for your clients to check account activity whenever they like. It’s worth doing, to make sure that paper-based statements haven’t been manipulated.

The key items to look for are:

• missing or out-of-order cheques
• unknown payment recipients
• payments made to unrecognised businesses or personal accounts

Simply letting staff know that you’re reviewing account activity can help prevent fraud.

5. “Make sure you audit high-risk areas often”

Your clients should routinely audit areas of their business that deal in:

• cash
• refunds
• product returns
• inventory management
• accounting and bookkeeping functions

Employees should be told that audits will take place but there shouldn’t be a schedule. By making the audits random, your clients are more likely to dig out fraud.

The ACFE also offers a check-up to assess fraud prevention processes. Even if your client doesn’t have anything in place, this check-up can be a good place to start.

6. “Train your employees to prevent fraud”

It’s really important that employees in fraud-prone areas of small businesses are taught how to:

• identify fraud
• prevent fraud
• report suspicious behavior by coworkers and customers

Help your client educate staff about some of the common warning signs. Set up an anonymous reporting system, too. It’ll make it easier for employees to share information about suspicious activity.

Your clients should create an official code of ethics to demonstrate that fraud won’t be tolerated. This will also help reinforce that fraud is a crime, which is important. People sometimes kid themselves that unethical behaviour is victimless when they’re in a business setting.

7. “Protect your business’s credit card information”

It might seem like an obvious fraud prevention tip, but you need to stress the importance of credit card security to your clients. They probably know they should be careful, yet they may still mix business and personal accounts when it’s convenient to do so. That can result in costly errors – such as tax fines or penalties.

Separating accounts also makes it easier to record business expenses. Encourage clients to protect credit card information and to use secure, online bill payment services wherever possible.

8. “Know who your business partners are”

Your clients should record basic information about the people they do business with. This should include:

• physical address
• contact names and phone numbers (at least two)
• mutual business relationships or references that can be checked

For further peace of mind, your clients should look up the businesses they’re dealing with to check:

• they’re a legitimate business
• who the owners are
• how long they’ve been in business

There are other great sources of background information like the Companies Office.

9. “Check into every case – no matter how small”

These fraud prevention tips only help if clients follow through. They must look into reports or suspicions, no matter how small or unlikely they seem. It’s important not to:

• become complacent with long-serving staff
• be distracted by the daily pressures of running a business

The earlier fraud is detected, the better the result for the business and the culprit.

10. “Get expert help if things don’t add up”

If a client follows your fraud prevention tips and the numbers still don’t add up, you may need to get more involved in auditing the business. Or you could refer them to ACFE for help with fraud detection.

Fraud prevention starts with a conversation

Small business owners consistently underestimate the threat of fraud – yet studies show they face the greatest risk. If they feel awkward about introducing fraud prevention measures with trusted staff – you’ll have to play the ‘bad cop’. They can tell their staff it’s all your idea.

As a bonus to your client, many of these strategies – such as dividing responsibilities and getting two sets of eyes on the books – also help with quality control. Encourage them to get started today.

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