As a small business owner, the last thing you’ll want is to become a victim of fraud.
Therefore, make sure you take the following five vital steps to reduce the risk of fraudulent activity.
1. Conduct Employee Background Checks
To reduce the risk of fraud from your employees, it’s vital that you conduct background checks before you hire members of staff.
You should never rely solely on employees’ work histories and references.
To hire people who are just as trustworthy as they are qualified for the positions, conducting background checks is something you shouldn’t dismiss.
You don’t have to run background checks on every person that applies for a job, as that will be costly and time-consuming. Instead, narrow down your list of potential new hires to two or three people and then run a background check for each of those finalists.
You’ll need to gain permission from prospective employees before running background checks.
If someone refuses a background check, it’s a sign that the individual is potentially untrustworthy, so he or she can be immediately discounted from your selection process.
2. Make Your Employees Aware of Fraud and Set Up a Reporting System
The more you make your employees aware of the types of fraud that could potentially affect your business, the more you can use your employees as your eyes and ears to spot any potential fraud risks.
Fraud prevention should be part of all new employees’ training programs. That will also be effective in demonstrating to workers who may be considering committing fraud that you won’t stand for such behavior and that you will take serious action, such as dismissal and reporting the crime to the police, should fraud be committed.
You should also set up a reporting system so that it’s easy for any employees who suspect their colleagues or others of fraud to bring the matter to your attention.
3. Implement Segregation of Duties
Segregation of Duties, which is commonly abbreviated to SoD, is an internal control that you should implement to prevent fraud.
It can also be used to identify errors in financial transactions.
The premise of SoD is ensuring no single person has the power to damage your small business or commit fraud against your business. That’s achieved by sharing duties among a team.
Instead of individual tasks being performed by one person, SoD ensures the control of a specific task is never in the hands of one person alone.
For instance, a task could be split into two or more distinct pieces or a task could require sign-off approval from another party before completion.
4. Implement Additional Documentation Checks
Documentation checking is another internal control you can implement to reduce the risk of fraud.
That simply means ensuring business owners view and verify all documentation, such as receipts, invoices, and purchase orders, on a daily or weekly basis. You could also reduce the risk of fraud by automating invoices and other documentation.
Things like checks should be numbered consecutively and “for deposit only” stamps should be used on all incoming checks. Also, checks above specified amounts should require two signatures before being processed.
5. Get Expert Assistance to Identify and Prevent Fraudulent Activity
Finally, if you find you’re having problems with fraudulent activities even after setting up processes to reduce the risk of fraud, or if you simply want an added layer of security, hire a professional accountant to perform a more extensive review of your business activities and audit your books.
In particular, a Certified Public Accountant or a Certified Fraud Examiner can provide you with extensive help to detect fraud and help prevent it.