How To Protect Your Small Business From Fraudsters

September 1, 2023

Internal fraud poses a significant and insidious threat to the financial health, reputation, and operational integrity of businesses across sectors.

A recent Australian survey found employers lost over $350 million to internal fraud over the past decade. The investigation covered August 2012 to August 2022, with six cases involving over $10 million being misappropriated. The research involved businesses that had experienced an employee act of fraud involving at least $1 million.

Signs to watch out for include unexplained financial discrepancies, sudden lifestyle changes among employees, excessive control over financial processes, lack of documentation for transactions and inconsistent vendor/client records.

Other red flags could be unauthorised transactions, rapid increases in expenses, unusual sales or inventory patterns, employee complaints or anomalies, and frequent overriding of controls.

There is a pressing need for small businesses to be able to identify and prevent fraud with robust financial controls.

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Internal financial controls are vital

Internal controls play an important role in protecting your business assets from theft or misuse and preventing falsification of purchase orders and payments, as well as ensuring the reliability of your financial reporting. Consider introducing some of the following measures.

1. Segregation of duties

You can help prevent fraud by allocating various parts of a financial transaction to different employees. When no single individual has total control of a transaction, it becomes more difficult for one person to commit fraud without it being noticed.

Payroll details, for example, such as names, positions, pay rates and bank accounts, could be set up by someone other than a second person who processes the payroll and a third person who approves it.

Ideally, the responsibility of receiving goods would sit with someone other than the individual who approved the purchase order or the person responsible for paying suppliers.

Similar segregation could also apply to sales transaction recording versus receipts of customer payments, asset custody as opposed to asset record keeping and audit, and between banking transactions and bank account reconciliations.

2. Regular audits

A systematic internal audit process at both planned and random intervals can help identify inconsistencies, rule violations, and potential fraud. Audits should be carried out by staff separate from those involved in processing and recording financial transactions.

Here’s a brief overview of how to structure an internal fraud audit:

• Plan the Audit: Define the audit’s scope, objectives, and key areas to be examined, setting goals for uncovering irregularities and conflicts.
• Choose Audit Intervals: Determine both planned and random audit intervals to ensure regular scrutiny.
• Appoint Independent Auditors: Assign audit responsibilities to individuals not directly involved in daily financial processes to ensure impartiality.

Monthly reconciliations of bank account statements with your internal financial transaction records are also a useful form of audit which should not be overlooked.

3. Data control

The maintenance and retention of accurate and detailed records are essential for detecting fraud. Business transactions should be documented, and technology can help you not only keep track of transactions, but also automate checks and spot irregularities.

Use accounting software and financial management systems to not only record transactions but also automate various checks and validations. For instance, establish rules that flag transactions exceeding certain thresholds or those that deviate from established patterns. Automated alerts can notify you of these potential red flags, enabling swift investigation.

Some of the software you may consider investing in include:

• Transaction Monitoring Software: Continuously monitors financial transactions and flags transactions that deviate from established norms or exceed certain thresholds.
• Anomaly Detection Software: Can identify outliers or anomalies that might indicate fraudulent behaviour, such as unexpected spikes or drops in transactions.
• Predictive Analytics Software: Uses historical data and statistical models to predict future outcomes. It can identify trends that might be indicative of fraud.
• Employee Monitoring Software: Monitors employee activities within a business’s systems and networks. It can track behaviour and identify unauthorised or suspicious actions.
• Invoice and Expense Fraud Detection Software: Scans documents and transaction data to uncover discrepancies or duplicates.

Even small businesses produce a large volume of data, and manual testing is time-consuming and unlikely to be effective. But software tools can help analyse data for unusual or suspicious patterns and red flags that are a signal that fraud may be occurring.

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Smart financing for safety

As Benjamin Franklin said, prevention is better than cure. Investing in fraud prevention tools and training can save you a lot more than their cost.

If you need access to finance to fund business projects, such as fraud and security systems, talk to your broker about a plan for your business.

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This information is for general information purposes only. The information contained herein does not constitute financial or professional advice or a recommendation. It has not been prepared with reference to your financial circumstances or business and should not be relied on as such. You should seek your own independent financial, legal and taxation advice as to whether or not this information is appropriate for you.