Small business owners are often oblivious to fraud in their own enterprise. But unfortunately it’s usually someone close to the business that perpetrates the fraud and often the fraud takes place over many years. When the business owner discovers the fraud they are devastated, not just because someone they trusted let them down but also because tens of thousands and sometimes millions of dollars has been lost.
No one likes to think their staff is ripping them off, but denial when it comes to fraud is a dangerous place to be. So here’s some advice about setting up a system in your business for detecting fraud.
1. Have a formal fraud policy
It’s a good idea to include a section in your policies and procedures manual about how fraud is dealt with in your organisation. Be specific about the process that is followed if fraud is uncovered. For example, state that the police will be notified and employment terminated immediately if an employee is found to have engaged in fraudulent activities. It’s also essential to carry out background checks on staff so you know whether they have been guilty of fraudulent activities in the past.
2. Institute a whistleblower mechanism
A key part of an effective fraud policy is a whistleblower mechanism. In a small business it can be difficult to set up a formal and anonymous whistleblower system like a fraud hotline. Instead, it’s an idea to adopt an open-door management approach to encourage staff to report suspected fraud directly to you as the business owner and to communicate to staff that there will be no recriminations by reporting a fraud.
3. Have sound financial checks and balances
A good way of reducing the risk of fraud is to ensure more than one person is in charge of your accounts. If your business is too small to justify more than one person in the accounts division make sure you have a great external accountant who verifies all the financial data in the business. And don’t delegate responsibility for checking bank statements. As the business owner, make this one of your responsibilities and go through bank statements on a weekly basis. It’s also a good idea to let staff know this is your practice.
It’s also an idea to have a formal expense approval procedure and carry out surprise audits from time to time. If your business handles a lot of cash it might also be an idea to install a security camera so you can keep a record of cash processes in the business. As much as possible automate financial systems in the business such as regular monthly payments to suppliers to reduce the opportunities for fraud in your workplace.
If you do suspect a staff member of embezzlement make sure you have hard evidence before going to the police. It’s also not a good idea to confront the suspected fraudster yourself – instead gather your evidence and leave the matter in the hands of the authorities.