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Posted at 05:30 AM ET, 05/30/2012

Small business advice: The five keys to fighting fraud

Desperate times call for desperate measures, the saying goes.


Business owners often don’t realize their firm has fallen victim to fraud until years down the road.
So it’s not surprising that fraud in the workplace increased during the economic crisis and recession. The median loss tied to occupational fraud is $160,000, according to the Association of Certified Fraud Examiners’ 2010 report, so companies have every right to be concerned. Moreover, the group says small businesses are especially vulnerable.

Fraud typically occurs when someone has an incentive, such as financial pressure, and opportunity, according to Michele Edwards, who heads the fraud prevention and detection practice of PRGX, a Chicago-based audit, analytics and advisory services firm. The recession certainly left many people facing new financial pressures.

Previous studies have also shown that it typically takes two years from the time fraudulent activity begins to the time someone notices that it’s happening, Edwards said. As a result, while some companies have already discovered fraud born of the recession, many more are likely to uncover problems in coming years. “I think there’s more fraud going on than anyone knows about,” she said.

Raleigh, N.C.-based Sageworks Chief Operating Officer Nicole Wolfgang said periods of sudden growth can open the door to fraud, largely because managers are forced to scramble to keep up with additional work and often fail to monitor employees, expenses and inventory. “During a period of high growth, there might be the potential for companies to drop the ball in some of those areas,” Wolfgang said.

Edwards noted that new markets or new partners tied to growth efforts can also potentially expose businesses to corrupt third parties.

Fraud can pad your general and administrative expenses as well as inflate your cost of sales. But there are ways to prevent your business from falling victim.

●Confirm who’s handling fraud control. “Do a quick and dirty assessment of fraud control,” Edwards said. “One of the questions I always ask [clients] is, ‘What are your responsibilities for fraud and misconduct management?’ If nobody has responsibility across a senior level, they have to establish some kind of roles and responsibilities.” It can be a working group, but someone needs to quickly identify areas that may need action.

●Screen and monitor those who touch or track money. Background checks are a must for accounting workers, and division of labor is also a good idea, especially for things like who gets the mail and who deposits checks.  “It’s good to have a few different people working on those things so that no single person has access or control over the entire system,” Wolfgang said. And make sure accounting workers take vacations. “If someone’s involved in fraud, they’ll be reluctant to take time off because if somebody else gets in their job for a few weeks, they’ll see that something’s going on,” she said.

● Conduct basic fraud-awareness training. It can be as simple as getting employees together and explaining that fraud can occur in any organization and describing what they need to know and how they can speak up if they see something unusual. “It’s Awareness 101, and it lets employees know that you’re watching,” Edwards says. “It serves as a detection element in and of itself.”

●Periodically remind employees to be vigilant. Edwards says how you do that depends on your company’s culture. But it could be as simple as e-mailing the staff a news article about a recent case of occupational fraud. You could say something like, “This recently happened to a competitor. It’s a great time to remind everyone here that you are responsible for preventing and detecting fraud.”

●Watch non-core vendors. PRGX recently found that one client who had gone through a hiring phase ended up paying hundreds of thousands of dollars to a completely fictitious vendor with a P.O. Box address in India. Also be aware that new employees might not be as knowledgeable about what fraud looks like, so if they get an invoice, they will pay it without as much scrutiny as a more experienced employee.

 Mary Ellen Biery is a research specialist at Sageworks, Inc., a Raleigh, N.C.-based financial information company that collects and analyzes data on the performance of privately held companies.

By  |  05:30 AM ET, 05/30/2012

Tags:  small business, advice

 
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