By Bill Swan, Principal Consultant
Table of Contents
Does your business have fraud prevention measures in place? Many small businesses might assume that corruption and bribery are concerns only for large organizations, given that these are the types of stories that often make headlines. However, this is not the case. According to a 2018 global study by the Association of Certified Fraud Examiners, companies with fewer than 100 employees are actually more susceptible to fraud than larger businesses, losing an average of $200,000 per incident—twice as much as larger companies, which lose about $104,000 on average. Given that many victims never recover their losses, taking preventative measures to protect your business is essential.
Preventing asset misappropriation, the most common type of fraud, is an excellent place to start. Asset misappropriation occurs when someone steals or misuses an organization’s resources for personal gain. Examples include theft of company inventory or supplies, fraudulent disbursement of funds, and manipulation of financial records to conceal theft. Below are some practical preventative measures.
Simple and Cost-Effective Fraud Controls
Small businesses can implement several low- to no-cost controls to reduce fraud risk:
- Approval Processes: Create simple approval systems using spreadsheets or digital tools.
- Digital Recordkeeping: Maintain digital records of all transactions and receipts.
- Accounting Software: Use affordable accounting software to track income and expenses.
- Documentation: Ensure all decision-making processes are documented in writing.
Separation of Duties
Another effective, low-cost measure is the separation of duties. This involves splitting critical tasks among employees to reduce opportunities for fraud. Examples include:
- One person places orders; another receives and checks them against the order
- One person approves purchases; another processes payments
- One person reconciles financial records; another reviews the reconciliation
- Rotate responsibilities periodically to reduce risks of collusion
- The owner or manager reviews high-risk transactions personally
- Schedule regular cross-checks of records to catch discrepancies early
Payment and Procurement Controls
Payment and procurement are critical areas where simple safeguards can help prevent fraud:
- Require two signatures for checks or approvals over a certain amount
- Use business credit cards with spending limits to control expenses
- Implement automated payment systems with approval thresholds
- Maintain an approved vendor list with clear selection criteria
- Reconcile bank accounts regularly, assigning the task to different individuals
- Require three quotes for vendor selection to ensure competitive pricing
- Develop clear gift and entertainment policies to avoid conflicts of interest
The Role of HR in Fraud Prevention
HR can help prevent fraud within its functional area through practical measures such as:
- Conducting thorough background checks during the hiring process
- Verifying references for potential employees
- Drafting clear job descriptions that define roles and responsibilities
- Implementing a written code of conduct to set ethical expectations
- Providing conflict-of-interest forms, training, and oversight
- Establishing a whistleblower mechanism for employees to report suspicious activities anonymously
Integrating Fraud Prevention into Operations
The most effective fraud prevention measures are those that become part of daily operations without overburdening your team. Start with small, manageable steps, and refine your processes based on what works best for your business.
Preventing fraud and corruption requires effort, vigilance, and teamwork. If your business has experienced fraud, consider it an opportunity to learn and improve. Reviewing the scenario, discussing lessons learned, and implementing solutions can strengthen your defenses and reduce future risks.
How FIT HR Can Support You
At FIT HR, we understand the importance of protecting your business from fraud and corruption. Whether you need help assessing vulnerabilities or developing preventative measures, we’re here to assist.
Contact us to discuss how we can work together to create cost-effective controls tailored to your needs.