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Stay on Top of Business Fraud Prevention by Watching for These 6 Warning Signs

William Delong - Guest Contributor profile picture
By William Delong - Guest Contributor

Published | Updated on
9 min read
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Business fraud could cost your company $1.8 million, and a majority of businesses won't be able to recover their losses, which is why you need to watch for these warning signs.

In "Ocean's Eleven," nearly a dozen con men combine their wits, acrobatic skills, and cool cars to rip off a casino in extravagant fashion. The casino owner only unravels the intricate scheme shortly after the anti-heroes have made off with millions.

Luckily, this isn’t a likely scenario for today’s small business owners, CEOs, and financial leaders in organizations. In the event that a business does fall victim to fraud, the evidence will be much easier to uncover by using accounting software and keeping an eye out for a few warning signs.

Is business fraud prevention really that important?

Yes. Business fraud is a big problem.

According to a 2022 report from the Association of Certified Fraud Examiners (ACFE)[1], the average loss per case over the 2,100 cases examined was nearly $1.8 million. More statistics from the study bear out the problem of fraud in the workplace.

Asset misappropriation (86%) was the most common type of business fraud, according to the ACFE study, costing companies around $100,000 each. 52% of businesses recovered nothing from the losses. Financial statement fraud schemes are the least common (9%)but the costliest with $593,000 as a median (middle) number per case.

Lack of internal controls contributed to one-third of all cases, making business fraud prevention a vital tool to keep this from happening to you. Business fraud can take the form of everything from tip jar skimming to complex payroll fraud. And these numbers reflect known cases, without accounting for situations in which the fraud was never discovered.

Further, PwC's 2022 Global Economic Crime and Fraud Survey[2] shows that nearly one-third (31%) of fraud comes from internal perpetrators, while more than one-fourth (26%) occurred after collusion between internal and external actors. An organization's most disruptive fraud occurred internally, but it was more than twice as likely (35% to 16%) to happen than cybercrime.

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Business fraud can be especially devastating to small businesses. Business fraud prevention becomes even more crucial to keep your cash flow coming in. And the smaller the business, the more devastating the fraud can be.

A $100,000 embezzlement case may lead to unpleasant litigation for a large corporation but could be crippling for a mom-and-pop shop. Small business leaders generally have less experience running a company than midsize and large business leaders, and small-business employees have less oversight but more autonomy across business functions.

Small businesses (100 employees or less) lost around $150,000 due to fraud in the cases examined versus $138,000 for larger companies (10,000 employees or more), according to the aforementioned AFCE study from 2022. As a small business owner, you'll find that loss is much more prevalent for you than it is for a larger company.

6 red flags to watch for to prevent business fraud

Regardless of your business size, you need to have a plan to prevent business fraud. Anti-fraud controls led to quicker detection and lower losses compared to companies that didn't have controls in place.

But enough doom and gloom. Let's look at some common red flags to watch for when it comes to spotting and then preventing business fraud.

1. Company funds are being transferred to/from countries you don't do business with

Why it's a cause for concern: Embezzlers can transfer company money overseas to launder it, then return it to a personal bank account with a muddled trail.

Example: You notice a credit in your account from Canada, even though you don't have any customers or clients from there.

What you should do about it: Review your books at least once a month. If money is going to or from a source/destination you're unfamiliar with, investigate, even if an employee tells you it's legitimate.

2. Employees are paying vendors or other employees with cash

Why it's a cause for concern: Cash payments don't leave a paper trail, allowing embezzlers to cover up fraudulent activity.

Example: One of your supervisors insists on paying a supply vendor (who just happens to be one of his old high school buddies) in cash because that's how the vendor prefers to be paid.

What you should do about it: Insist that all company business is conducted using checks or company credit cards (save for the smallest of incidentals, such as tipping a pizza delivery person). If you hear an employee is making cash transactions for business purposes, investigate.

3. You spot vague business deals that lack a clear purpose

Why it's a cause for concern: Embezzling employees can set up sham deals with outside accomplices to make fraud appear like legitimate company business.

Example: One of your managers sets up a nebulous "consulting" gig for their brother-in-law that pays a retainer of $1,000 per month.

What you should do about it: Require all employees to provide a clear and worthy business case for any and all business deals, and regularly check to ensure that those deals are still providing business value.

4. Employees are making deals with vendors that haven't been approved through proper channels

Why it's a cause for concern: Embezzling employees can bypass normal checkpoints to set up fraudulent deals with sham vendors by going over the heads of management.

Example: You come in on Monday morning to hear from one of your employees that they set up a new purchasing contract with a parts supplier that you've never heard of. The deal seems too good to be true.

What you should do about it: Institute a policy for all business deals requiring approval from multiple managers.

5. Your books aren't balanced

Why it's a cause for concern: Balanced books are the healthy pulse of any business. If you have money coming or going out that you can't account for, it means that someone at your company is up to something or your accounting is sloppy. Neither situation is good.

Example: You check your books at the end of the month to find that you're $1,500 short with no explanation.

What you should do about it: Check your accounting or bookkeeping software every day to make sure that everything is accounted for. The software will alert you when something doesn't add up.

6. Business and personal expenses aren't being separated

Why it's a cause for concern: Using a corporate card to pay for personal expenses is a big no-no, even if the employee pays the company back. It muddies the waters and makes it more difficult to spot embezzlement when it does happen.

Example: You have an employee who keeps "accidentally" putting gas in her personal vehicle on the company credit card, even though she pays you back in cash.

What you should do about it: Enforce a strict policy that only allows legitimate business expenses on your company credit cards. This will also save you from having to sift through expenses at tax time. Some expense reporting software even allows receipt scanning.

Portrait of a fraudster

While the following signs could have many different, innocent explanations, the ACFE survey found that fraudsters commonly display at least one of these behaviors in three-fourths (76%) of business fraud cases:

  • Live beyond their means, like owning a car they can’t afford.

  • Complain about financial difficulties.

  • Have unusually close relationships with vendors or suppliers.

  • Show control issues (e.g., an unwillingness to share their duties with assistants or temporary fill-ins).

  • Get irritable and defensive.

  • Intimidate or bully co-workers.

  • Suffer through divorce or family problems.

  • Display a wheeler-dealer attitude.

None of these behaviors are grounds to accuse an employee of fraud, but—when combined with the red flags outlined above—they're worth keeping an eye on as part of a bigger picture.

Though it may seem reasonable to be more suspicious of newer employees who haven't proven themselves yet, embezzlers who have—on average—been with their company for 10 years stole around $250,000, according to ACFE.

That's because such employees have generally had time to become familiar with the workings of a business, have suffered a real or perceived slight that motivates them to try to collect amends, or even recruit accomplices to help them commit fraud (the average number of people involved in a given scheme is three).

What to do when you identify business fraud

Preventing significant fraud or embezzlement at your business starts with hiring the right people, treating them fairly, and knowing the signs to look out for.

But, what do you do if you've spotted obvious signs of fraud and need to take action? 

What to do

What NOT to do

Set up an investigation team made up of managers, and recruit outside help, if necessary. Keep detailed notes throughout the investigation.

Don’t jump to accusations. Even if there’s only a tiny chance that someone is actually innocent, follow due process. A false accusation can do irreparable damage to the relationship between the employee and your company, and your company could be sued.

Review the records in your accounting software to pull evidence.

Don’t interview possible accomplices together, and don’t interview suspected employees by yourself. Have an HR rep on hand for all interviews, and record clear notes of what was asked and what was said.

Once you have sufficient evidence of embezzlement, contain the damage by restricting the fraudulent employee’s access to company finances.

Don’t reveal your suspicions before you have solid evidence. Gather as much evidence as you can before making your investigation known. A suspected embezzler can delete emails or clean up financial records if they find out you’re on their trail.

Identify the source of the breach that allowed the embezzlement to happen, and fix it. If you don’t already have a fraud reporting hotline (phone and/or email), now is the time to set one up. The ACFE study found that 42% of fraud cases are uncovered by whistleblowers, followed by internal audits (15%) and management reviews (13%).

Don’t try to take the law into your own hands. Give law enforcement your full cooperation to help them do their job, and if you’re worried about negative exposure, talk to your attorney about how to proceed.

Praise and protect the whistleblower, if you were tipped off by an employee.

 

Software reviewed by Capterra can help you prevent business fraud

Business fraud prevention is just one piece of the small business accounting puzzle, and software tools can help you monitor your company's financial situation. To stay on top of a wide variety of business accounting topics—from when it's time to find the best free accounting software to hiring an accounting firm.

Take a look at some other articles that can help you strengthen your small business's finances as you keep an eye on the financial health of your business.



Looking for Accounting software? Check out Capterra's list of the best Accounting software solutions.

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About the Author

William Delong - Guest Contributor profile picture

William is a professional writer and editor specializing in a variety of industries including legal, medical, marketing, and technology. He has over 13 years of experience delivering engaging content.

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