How does one avoid fraud in the business world? Fraud is a serious issue that can cause your business to lose money. This post will show you how to prevent fraud in business.
Running a business is not easy.
While it can give you your target profit, there are instances when you need to deal with major issues, like business fraud.
What is Fraud In Business?
Corporate or business fraud involves those activities carried out by a company or individual in an illegal or dishonest manner.
These fraudulent activities are often undertaken to provide a favorable financial outcome to the people or establishments involved.
The schemes also usually come under the façade of legitimate business practices, making it a bit difficult to spot.
Several crimes also fall under business or corporate fraud.
These include the following:
Identity Theft
This is one of the most popular types of fraud in business to be prevented or avoided.
Left undetected and unmanaged, this issue might cause your business to lose thousands of dollars.
Those involved in this activity might steal the identity of your business and use it as a means of accessing your credit.
Fraudsters might access things, like bank statements, federal tax identification numbers, and financial statements.
To prevent this kind of fraud, you need to secure sensitive business information and financial statements.
Lock physical copies in filing cabinets and ensure that only authorized people can access them.
Also, make digital copies difficult to access by securing them with difficult passwords and usernames.
Do everything you can to avoid being a victim of phishing [deceptive email] scams.
In addition, avoid handing business information, especially sensitive ones, to anyone.
Asset Misappropriation
This form of fraud happens when an employee steals funds from the company.
It is one of the most common types of fraud, and it comes in many forms.
One is a forged check.
It is a straightforward fraud, which takes place when someone gets a hold of a company check and make himself the payee, and forges the signature of the authorized owner.
One sign that this is happening in your business is when you notice that some checks are no longer reflected within your financial approval system.
Detecting fraud in business that involves a forged check is also possible by checking whether your checks have unusual payees.
Embezzlement
Embezzlement involves the illegal use of your business funds by the person who has control over them.
For instance, your bookkeeper might use business funds for his personal interests.
In most cases, stories about embezzlement are kept private because those involved hold high positions in the company.
Most of them feel embarrassed after their fraudulent activities are revealed, so they try to settle the matter privately.
Payroll Fraud
Payroll fraud often happens in small businesses.
One form of payroll fraud involves your employees asking for pay advances without settling them.
There are also instances when some of your employees lie about the total number of hours they worked.
Another type of payroll fraud involves someone clocking in for another employee who is not at work.
To prevent such from happening to your business from this kind of fraud, make it a point to perform background checks on all potential employees prior to hiring them.
Auditing payroll accounts are also the key to catching fraudulent behaviors right away.
Other common kinds of business or corporate fraud are:
- Bankruptcy fraud – involves undervaluing or hiding assets, destroying documents, and concealing company information.
- Employment fraud – falsifying employment application information or failing to report felony charges and convictions before being hired.
- Insurance fraud – falsifying documents for insurance claims
- Wire fraud – involves the use of electronic communications, like radio, TV, or internet, in making false representations.
- Internal theft – happens when employees steal the company’s assets, including products and office supplies.
With the many kinds of fraudulent activities, it is safe to say that fraud takes many forms and shapes.
It can affect your business in many ways, not just in the financial aspect.
That said, you have to detect where your company’s weakness is so you can take steps on protecting your business from fraud activities.
Warning Signs Of Fraud In Business
One effective solution for detecting fraud in business is to be aware of some red flags indicating that at least one person in your company is involved in fraudulent activity.
Some warning signs to look out for are the following:
- Employees who seem to live beyond their means
- Unusual emails
- The resistance of your staff to tighter controls
- Excessive transactions – multiple payments on just one bill
- Multiple company bank accounts
- Secretive behavior or controlling personality of some employees
- Hard to understand accounts on your company’s financial statements
- Shortages in assets, like cash or investments
- Late or infrequent financial reports
- Large liabilities linked to unexpected contracts
- Serious internal control issues detected and reported by hired external auditors
- Abnormal and sudden changes in your company’s account balances
- Unusual transactions and write-offs
- Unexplained differences between actual and budgeted income or expenses
If you detect any of the warning signs of fraud then keep in mind that there might be an honest explanation for it.
One solution on how to deal with fraud is to approach the employee involved right away.
However, you have to do it in a non-confrontational [don’t be aggressive] manner.
Ask him to explain to you some of the questionable transactions, so you can understand.
If you think that fraudulent activities really exist in your company then make it a point to investigate the issue thoroughly.
How to Prevent Fraud in Business – Effective Internal Controls To Prevent Fraud
You can actually establish effective internal controls to prevent fraud in your company.
Internal controls refer to programs and plans you can implement.
They will serve as a means of safeguarding the assets of your company, detecting and preventing theft and fraud.
Also, ensuring the integrity of your company’s accounting records.
One effective internal control that can help in avoiding fraud in business is the separation of duties.
This can minimize the risk of your company dealing with fraud.
For instance, if you have a retail store, then you should have a separate manager, cash register employee, and salesperson.
One employee should be tasked to tally the receipts in your cash and check register while another prepares the deposit slips.
You should also make another employee responsible for depositing the money to the bank.
By separating duties, it will be easier to reveal discrepancies in collections.
Another method of effective internal controls to prevent fraud is documentation.
This involves documenting every business transaction (ex. sales receipts, bank deposit preparation, sales, etc.).
By documenting everything, you will have something to look to daily or weekly as a means of verifying transactions.
Proper documentation, which is one of the ways to prevent fraud, is also possible by numbering purchase orders, invoices, and checks in a consecutive manner.
Another method of effective business fraud prevention tips that fall under documentation is to use stamps labeled as “for deposit only” on all your incoming checks.
All your checks should also require two signatures whenever they go beyond a specific dollar amount.
Furthermore, you need to avoid the use of a signature stamp as this might make it easier for your staff to do fraudulent activities.
Aside from that, you can also implement the following active and passive internal controls designed to help you in protecting your brand and company from fraud:
- Separation of functions – This involves dividing the functions and processing of business transactions in such a way that you involve various organizational units.
For instance, your administrative assistant should be responsible for opening the mail and logging cash receipts before moving them to the finance and accounting department.
- Physical restraints – One way to implement this solution on how to prevent business fraud is to take advantage of padlocks, locked file cabinets, and fences.
- Document matching – You should implement this together with pre-numbered accounting forms.
This is one of the best ways to prevent fraud because this can restrict unauthorized forms.
It can also ensure that form processing and receipts are based on the issued sequence.
- Signatures – It is also advisable to look for authorized signatures in certain business documents.
This is one of the most effective fraud prevention tips as the presence of authorized signatures can prove that the business documents are approved and authorized.
You should not consider documents as valid until they have the required signatures.
It is also advisable to implement document countersigning.
This indicates that at least two authorized and designated individuals approved the document.
- PINs and passwords – Do not forget to use personal identification numbers and passwords for all the mobile devices and computers used in your company.
- Audit trails – This specific internal control designed to help you on how to prevent business fraud, requires you to implement and use automated systems with audit trails.
These systems will record all changes made to a business record.
With that, your auditor can easily trace any change to its source.
- Focused audits – Make it a point to perform focused audits if you want to know how to detect fraud easily.
As the name suggests, a focused audit has a narrow focus.
- Surveillance – Putting surveillance cameras around your establishment is also an effective method if you want to learn how to prevent business fraud.
With proper surveillance, potential perpetrators will think twice before doing any fraudulent act.
It is because they know that someone is watching them.
Once you set internal control programs in place, make it a point to monitor and revise them on a regular basis.
This is to ensure that they stay current with technological advancements.
In case you do not have internal controls or fraud prevention programs, consider hiring someone who has professional experience in this field.
This professional will spend time analyzing the policies and procedures of your company, offer recommendations regarding appropriate programs on how to prevent business fraud, and assist you in implementing them.
Other Tips On How To Protect Your Business From Fraud
Whether you are a business owner or manager, your main priority is probably protecting your company from fraudsters.
To help you do that, here are some simple tips that you can apply:
Know How To Spot Or Detect Imposters
How to avoid a scam is easier to answer if you know how to detect scammers and imposters right away.
Note that scammers often pretend that they are trustworthy.
Avoid doing business with them.
Also, avoid sending money or giving out sensitive business information to an unexpected request from emails, phone calls, and texts, especially if these are from people and organizations you are unfamiliar with.
Set Clear Fraud Risk Policies
Setting up fraud risk policies and making your employees aware of them is a way on how to protect your business from fraud.
The policies should include the kinds of fraud as well as the consequences that your employees will face if they get caught doing them.
By having these policies in place, your employees will not be tempted to commit fraud as they are aware that the management is watching them.
Establish An Anonymous Reporting System
This is for employees who are afraid or hesitant to report to their employers some incidents of fraud.
With this reporting system around, they can report fraudulent activities in your organization through a website.
This can protect their identity and themselves from the people involved.
You can also use a tip hotline.
Keep Track Of Vacation Balances
Employees who avoid taking vacations and try to do things on their own may look impressive.
They may appear as your most loyal employees.
However, they may also avoid vacating their spots because they are hiding their fraudulent activities.
They do not want someone to detect their fraud in case they are away for a certain period of time.
That said, you have to spend time monitoring the vacation balances of your employees.
You should also consider rotating your employees to different jobs within your organization.
This is a huge help in revealing fraud as another employee may be able to check and review the other one’s activities.
Impose Penalties
One solution on how to deal with fraud is to show your employees that you are truly imposing penalties for those involved in fraudulent acts.
Once you confirm the presence of fraud, you have several options for penalties.
Basically, there are three levels of consequences that you can implement.
They are; civil lawsuit, criminal prosecution, and termination.
If possible, impose the most severe penalty that the law allows.
This may look harsh, especially for perpetrators who were among your most trusted employees.
However, you have to do it to show everyone that you have zero tolerance for deceitful activities.
If you don’t impose severe penalties then you are just tempting others to do the same.
Avoid Panicking
Confirming the presence of fraud in your organization may sound scary but you have to avoid panicking.
If you panic, you might be tempted to act rashly by confronting the person involved right away or terminating him without gathering solid pieces of evidence.
Yes, you need to impose severe penalties but only after you have gathered and analyzed the pieces of evidence.
That’s why you have to stay calm first so you can act in a more rational manner.
That way, you can develop an effective plan for dealing with a suspected fraud when it happens.
Lock Down All Business Data, Especially Sensitive Ones
Understand the importance of backing up your company communications and financial information.
If you do not have a backup for them yet then this is the perfect time to do it.
In case you have no copies of business data stored on hard drives, you can seek the help of an IT consultant.
He will be able to advise on how to retrieve the business data from hard drive of the suspected fraud.
Preserving all e-mail communications is also important.
In addition, you need to have complete copies of your financial information, including expense reports, bookkeeping records, payroll, and financial statements.
Remember that those who commit fraudulent acts usually have access to the mentioned records.
You have to gather these data so you will know exactly where to look when investigating someone.
Seek Professional Help
Avoid handling this major problem on your own.
The first thing that you have to do is to contact a lawyer.
You should then call a trusted accountant who has experienced certified fraud examiners (CFEs) as part of his staff.
These CFEs know where to find evidence and preserve them.
They are also the ones who can explain the case to the juries, law enforcement officers, and judges.
Conclusion
It is vital for any business organization, regardless of how small or large it is, to set up a fraud prevention plan or program.
As a business owner, you have to be aware of simple yet effective tips on how to avoid scams and fraud.
It is also advisable to understand some methods on how to detect fraud.
That way, your company will not suffer from the hands of people who undertake fraudulent activities for their benefit.
Have you been defrauded before?
How was the experience and what steps did you take to ensure it doesn’t repeat?
Please share your experience!
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