Basics of Fraud Protection for Small Business

A new report by Javelin Research finds small business owners lost about $8 billion to fraud last year alone. The report also says small businesses are 15% more likely to face fraud than the general population. Unfortunately, according to a TD Ameritrade survey, only 1% of business owners say it’s a top concern for them.

The risk is real, and protection is easier than you think. This 5-step Business Protection Plan is based on the concept of collapsing the “Fraud Triangle”. You can’t control the base — motive and justification. Reducing opportunity is where the business wins or loses.

Five Step Business Protection Plan

1. The first step is actually making a plan. You must be clear on the resources allocated to prevent fraud, and consistently use them for that purpose. Fraud control only works if it’s implemented.

2. The proven method to catch both mistakes and dishonest bookkeeping is something called “Segregation of Duties”. This means the same person does only one of the following activities in a transaction:

* Authorization

* Custody

* Record Keeping

* Reconciliation

While this method works, it’s not often used. Small businesses don’t have extra employees and the ones they have, they trust. If you can’t afford an employee for each category, then designate someone to check the work. If it makes you uncomfortable to separate duties to prevent fraud, think that you’re helping everyone you work with avoid mistakes instead.

3. Be inconsistent in how you check for fraud. If you have processes that work for you, keep using them, but add new controls. For example review customer lists, payables invoices, bank statements, and inventory at odd times and different ways. Again, this catches errors unexpectedly as well as a thief.

4. Make sure you understand the risks of the technology you use. This is a dynamic problem, and it is the one place in the plan you may need to get some help. An example I see every day is how many small businesses use QuickBooks, but how few use the audit trail feature. It’s not easy to know the details of what your technology protection needs are, but finding a resource that will help you in this area is well worth it.

5. Step 5 actually goes after the rationalization part of the triangle as well. Make sure you talk about fraud prevention often. This can help you discourage thieves and encourage whistle blowers.

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