Successfully starting a small business in the U.S. is difficult on its own. In fact, nearly half of all new businesses fail by the end of their fifth year. And since roughly 33% of organizations are impacted by some form of fraud, it wouldn’t be a leap to suggest it has a part to play. According to the Association of Certified Fraud Examiners, average businesses lose a median $117,000 each year due to fraud. And to a new organization, that type of blow can be fatal. That’s why recognizing and implementing fraud prevention methods from the start is vital.
Of course, organizational fraud occurs on a massive, widespread scale. It impacts large and small businesses alike, and reaches into the private sphere as well. As such, individual consumers lost a collective $8.8 billion to fraud in 2022. Unfortunately, the problem isn’t going away; quite the opposite, it seems to be growing worse. However, while instances of fraud are rising, organizations including small businesses can take steps to secure themselves.
Here, we’ve outlined twenty tips that can help lessen the impact of fraud and even stop it before it happens. So, if you’re looking for implementable fraud prevention techniques, read on.
Methods for Organizational Fraud Prevention
1. Know Your Employees
One of the first steps for fraud prevention in an organization of any size is making sure you know your employees. In fact, before you ever hire someone, you should use the application and interview process to figure out who they are. This often means running background checks to ensure they don’t have past instances of fraudulent behavior. After all, a person can slip right through the cracks into an organization when a simple check would have revealed damning information.
Understandably, many businesses hire individuals who seem entirely upstanding only to realize later that they’ve made a mistake. So, vetting potential employees during the hiring process doesn’t always weed out those who could commit fraud. However, since it can inhibit some instances of such behavior, it should come as a standard practice.
Some business owners might argue that this sort of process becomes costly. However, it’s far better to pay a smaller amount when hiring than lose tens of thousands later.
2. Establish Formal Hiring Procedures
Of course, efforts to prevent fraud during the hiring process extend far beyond background checks. And maintaining a formal, standardized method for bringing on new employees has a large roll to play. Perhaps you’ve read a book or seen a movie where a desperate employer hires the first person to step into their shop. It might make for a good story, but in terms of fraud prevention, it’s an absolute nightmare.
Now, that doesn’t mean that your small business has to have a five-step interview process to hire someone to keep inventory. But if your method for gaining employees includes hiring on the spot, you might be setting yourself up for failure.
At the very least, you should have a sit-down conversation with an applicant, where they explain their work history. But the type and importance of the position will also help determine how in-depth the process should become. If you’re looking for someone to stock shelves, the steps for hiring might grant less intensity. However, if you’re looking for the head of your accounting department, it obviously needs to stay fairly rigorous.
At the basest level, strengthen your hiring process and ensure you have some sort of formal procedure when finding new employees.
3. Vet Your Partners
In the same way you must know who your employees are, you should do the same for your partners. Many businesses, both large and small, forge relationships with other organizations that stand to better them both. However, throwing in with the wrong group can have the opposite result. As such, you should always check into partnership opportunities before agreeing to them. If the organization has a good rapport with others, chances are a relationship could prove helpful. However, if they have few partnerships and provide little information, watch out.
Of course, organizations must start somewhere in their business partnerships. So, not having other working relationships isn’t always a bad thing. But that’s another reason to closely research and discern whether an opportunity is valid or suspicious.
4. Have Multiple Individuals Handle Accounting and Bookkeeping
As part of an internal checks-and-balances system, businesses should have more than one pair of eyes on finances. Where one person might find it tempting to shift money around in their personal interest, having two lessens the opportunity. And since motive and opportunity represent the pillars of fraud, this eliminates half the equation.
Alternatively, if fraud attempts occur from outside the financial team, having multiple people watching provides better chance to catch discrepancies. So, no matter who commits fraud, requiring at least two individuals to look over finances helps prevent or identify it.
Again, this might be more difficult to implement for smaller businesses who have fewer workers. And hiring new employees to help with this isn’t always plausible. But positioning existing staff in a way to help in this area could save resources and expenses down the road.
5. Keep Close Watch on Accounts
Of course, some organizations might subsume this fraud prevention method under having multiple people check finances. However, it isn’t always plausible to handle things that way. Sometimes, an individual outside the finance department should also keep a close eye on bank statements and other documents. That way, if something does appear out of line, they can approach the accountants to inquire why.
Knowing how your accounts should appear and what they actually look like helps raise a red flag when things are off. And because every instance of fraud should be investigated, keeping a close eye on bank information can help catch breaches quickly.
6. Document Everything
When it comes to areas like finances and inventory, make sure to document everything. Moreover, do your best to keep that documentation as detailed as possible. Of course, this task can become quite time consuming, so establishing concrete procedures can help expedite it. However, if an instance of fraud does arise, you’ll have information as to where, when, and what happened.
7. Carefully Monitor Information Disposal
Organizations which keep careful documentation of their processes, accounts, and other areas know that information takes up space. And sometimes, whether digital or physical, it becomes superfluous. So, in instances where information disposal becomes necessary, organizational leaders need to ensure a straightforward and detailed process for its destruction.
In essence, they must recognize why the documentation is no longer necessary to keep, what its loss entails, and how to do so properly. Because once that data is unrecoverable, they can’t undo the decision. Furthermore, if employees destroy information without consent from managers, the situation should be questioned and investigated.
Another check for information disposal is to maintain records for a minimum time period. That is, a number of years that must elapse before the information becomes obsolete.
Information disposal is a necessary part of business, but you must carry it out carefully and intentionally.
8. Secure Physical and Digital Property
In an effort to mitigate losses from improper information disposal, steps must be taken to secure physical and digital assets. Organizations should keep backup files, stored in different locations, for sensitive documentation. And on a more natural level, they must do everything to secure the physical premises of their business.
For example, locking doors to offices when not in use, keeping computers logged out when stepping away, and so on. That way, the chance for a security breach lessens – and with quite simple steps.
Ensure that all employees know the required steps for securing their spaces and technologies, and carefully enforce the policies. It might seem inconvenient to lock a door every time you step away, but it’s far less so than having data or devices stolen.
9. Identify Your Organization’s Weak Points
One of the best methods of fraud prevention is recognizing where your business is weakest. Sometimes, it might be a simple thing, such as a lack of security that could easily be heightened. Other times, the issues might be more difficult. For example, having a sudden burst of company growth with no clear guidelines on how to secure important information. Regardless the level of difficulty, knowing where you need to improve is the first step forward. Because if you don’t know what needs to happen, you’ll only be grasping in the dark.
As such, do whatever you can to identify the various weak points in your organization’s security. But more so, ensure you then take steps to strengthen those areas and eliminate the opportunities for fraud.
10. Conduct Regular Audits
Identifying your businesses areas of weakness shouldn’t happen once. Rather, conducting regular audits should become commonplace, whether your organization is large or small. Furthermore, these audits don’t have to cover one area alone. They should deal with finances, internal processes, security, and a host of other functions that, if left unoptimized, could lead to instances of fraud.
Of course, these audits can be handled internally. But sometimes, it may prove more convenient and efficient to hire outside parties to conduct them. Regardless how you decide to proceed with regular audits, they need to occur. Otherwise, it will be difficult at best to figure out the weak points in your company’s security.
11. Set Internal Checks and Balances
Developing a system of checks and balances will likely look different from one organization to another. However, having clear chains of oversight can help lesson the opportunity for fraud. This doesn’t mean establishing a “Big Brother” mentality, where employees feel constantly watched and mistrusted. Because that can lead to other issues that negatively impact the business. However, determining a system where finances, assets, and other important areas pass through several sets of “gates” helps lessen the chances of bad acting.
For larger organizations, this might mean more departmental systems, where one team checks another’s work. In smaller organizations, this will likely be more on the shoulders of individuals. So, it could be more difficult in those situations to help employees feel as if they’re not being spied upon.
Ultimately, do what works best for your organization. It doesn’t have to photocopy another team’s structure or way of doing things to be successful. But ensure that you implement a way for keeping one another accountable. Again, motive and opportunity are the pillars of fraud. So, removing one causes the building to crumble.
12. Raise Awareness of Fraud
One of the easiest ways to miss a problem is not recognizing it’s an issue in the first place. That applies as much to fraud as anything else. If your employees don’t recognize how prevalent fraud is or what it is, then it’s more likely to occur. After all, bad actors operate better in situations where they know there’s less a chance of being caught.
So, educate your workers on the signs and symptoms of fraud in an organization. Show them how to identify and report it. You might even showcase real-life examples of fraud, so they know its impact. If people don’t know what to look for, breaches will simply fly under the radar.
How you choose to go about this is entirely up to you. Perhaps hold a seminar or company-wide luncheon to discuss the subject. Maybe you put together a short course covering related topics. Regardless, do your best to get employees involved and actively thinking. That way, they easily recognize fraud for what it is whenever it appears.
13. Provide Employee Training
If you want to take awareness a step further, you can provide training for fraud prevention. In-depth instruction will only further your employees understanding, and in terms of fraud prevention and detection, it can prove invaluable.
14. Educate Managers on Types of Fraud
Lay-level employees aren’t the only ones who need to be educated about fraud. In fact, managers may require more extensive training than their workers. After all, they’re responsible for overseeing entire teams and departments in larger organizations. In smaller settings, they might run a full branch or store. So, their responsibilities are only heightened. So, provide extensive training for your managers. That way, they can identify different types of fraud and recognize areas of potential threat.
15. Establish Clear Guidelines for Asset Use
Even accidental fraud can negatively impact a company. Sometimes, employees simply don’t recognize that they’ve committed fraud, because they aren’t educated on the different types of fraud. However, one of the most common forms of fraud is asset misappropriation. That’s whenever an employee uses company resources for their personal benefit, be it financial or material.
In other words, some individuals commit fraud simply by printing a personal document from a company owned printer. This might not seem like a huge deal, but the instances can pile up and cause financial discrepancies.
Now, that doesn’t mean individuals should never use company resources. But there need to be clear guidelines on when it’s appropriate to do so, and have documentation if necessary. A small restaurant owner may give their employees permission to make one free meal each shift, and that’s fine. But it needs to be clearly communicated that anything above that is considered theft.
Yes, this sounds serious, but that’s because it is. If every employee at a restaurant takes food at will, multiple times per day, the business could find itself losing large quantities of supplies.
16. Create Clear Guidelines for Fraud Reporting
Sometimes, employees might recognize an instance of fraud but have no idea how to report it. So, tragically, fraud might be apparent but not dealt with. That’s why it’s essential to set clear guidelines on reporting. If an individual discovers attempted fraud, whether successful or not, they need to know who to report to. Sometimes, it might mean going to the HR department. At smaller businesses, it might mean reporting to the owner or even civil authorities.
Regardless the actual structure implemented, it needs to be clear. That way, individuals have no trouble approaching the proper party and passing along information that could save the company from larger troubles.
17. Ensure Protections for Fraud Reporters
Another hurdle to fraud reporting is the fear of retribution. Setting up proper channels of reporting only goes so far if individuals have more reason not to report than they do to report. So, it could be beneficial to ensure anonymity or other protections for employees. That way, they can report instances of potential fraud without fear of personal harm, physically, emotionally, or socially.
18. Recognize the Risk of Cyber Fraud
Fraud can happen from within an organization or come from the outside. One of the primary ways bad actors attack a company from the exterior is through cybercrime like phishing and other hacking methods. Typically, these attempts center around gaining an individual’s trust through nefarious means and gaining access to sensitive material. So, it’s essential to train your employees on cybersecurity and ensure they know how to stay safe online.
19. Take Every Case Seriously
The prevalence of fraud requires organizations to take it seriously, and that means investigating every case. Even when it initially appears like fraud might be misreported, deeper digging could reveal otherwise. That’s why no matter how small or insignificant seeming an issue is, you’d do well to check into it. After all, even if the problem is small, when someone realizes they can get away with it, they’ll likely attempt it again. And ultimately, this could grow into a much larger issue. So, your best option is to nip fraud in the bud and keep it from gaining a foothold.
Whether there’s an allegation against your best or worst employee, be fair, investigate the accusation thoroughly, and tweak your system to ensure things are better moving forward.
20. Seek Legal Guidance
Often, fraud moves beyond internal, organization handling and into the court system. Because it’s a crime, it can incur serious punishments. If you find yourself out of your depth with an allegation or simply don’t know how to proceed, don’t fear seeking legal guidance. After all, you need to know your options and how to proceed legally. Otherwise, you could find your organization in deeper trouble.
Furthermore, you don’t have to wait for fraudulent activity to take place to seek legal help. Refer to experts and professionals early on to mitigate circumstances of fraud and help keep them from happening in the first place.
Learn More About Fraud Prevention
Fraud prevention is a vast topic not just because of the sheer number of types of fraud but also because it constantly changes and shifts. As such, it’s important to try to stay on top of new information and developments.
Fortunately, VTR Learning can help. We offer several courses on fraud prevention. That way, you can dive into the topic and come out more confident in your efforts. Even better, these courses are accredited with different organizations for continuing education credit such as AICPA/NASBA, HRCI, and SHRM.
So, if you’re looking to know more about this vital topic, be sure to check them out today.
Article written by Braden Norwood
Last updated November 7, 2023