Small businesses are more likely to be subject to fraud than big firms


Small business owners beware. According to a recent report issued by the Association of Certified Fraud Examiners (ACFE), as many as one in 20 small businesses may be victimized by fraud.
In its 2002 Report to the Nation on Occupational Fraud and Abuse, the ACFE concluded that small businesses are the most vulnerable to occupational, or employee, fraud. In fact, businesses with fewer than 100 people are more likely to be subject to fraud than companies with more than 10,000 employees. And while the largest companies suffered losses of $97,000 on average, small businesses’ losses averaged $127,500.
Employee fraud is only one part of the problem, reports the Wisconsin Institute of CPAs. Small businesses need to be alert for customers and vendors who commit fraud, as well. Here are some of the ways CPAs say you can help protect your company’s assets from the unscrupulous.

Employee fraud
Scrutinize the hiring process. First and foremost, you must make every effort to hire the right employees. Conduct thorough background checks that verify past employment history, references, education and certifications, and the absence of a criminal record. This is particularly important if the employee will be handling inventory and cash.
Create a ‘no tolerance’ culture. The most proactive step you can take in preventing employee fraud is to develop a culture that emphasizes ethical business practices. Let employees know that you are committed to preventing fraud and have in place a written policy that informs employees of the consequences for unethical behavior. Be sure to distribute this policy to all employees.
Separate accounting duties. Small businesses are often vulnerable to fraud because they lack the accounting and management oversight found in larger firms. For example, in many small businesses one person is responsible for all accounting and bookkeeping transactions. Having the same person open mail, make deposits, pay invoices, reconcile bank accounts, and oversee petty cash creates an environment ripe for fraud.
Small business owners should consider having bank statements sent to their home where they can carefully examine them and look for large or unusual deposits or payments. Handing the open statements over to employees in charge makes it clear that they are being reviewed.
Keep in mind, too, that when it comes to check signing, it is wise to require more than one signature on large checks.

Customer fraud
Be alert for stolen credit cards. Purchases made with stolen credit cards are proliferating at an alarming pace. To help protect your business, insist that your employees keep the customer’s card in their possession until they have verified that the signature on the back of the card and on the sales receipt match. Employees should also be trained to look for suspicious behaviors that might point to credit card fraud. These include nervousness, attempts to rush the transaction through just before closing or making multiple purchases of identical expensive items, among others.
Verify Internet orders. If your business accepts online orders, you may want to look into a credit card fraud protection system. The Address Verification System (AVS), one of the most widely used, confirms that the billing address provided by the consumer matches the billing address that the credit card issuing bank has on file for that customer. You can obtain AVS from your merchant account provider. Also, you should be especially vigilant when you are asked to ship merchandise to an address that differs from the credit card billing address.

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Vendor fraud, scams
Educate your staff. Businesses are frequently targeted by a number of scams, many of which have been going on for years. The best prevention is to educate your employees about the most common types of scams against small businesses and to limit your purchasing to people you know and trust.
Do your homework on suppliers. If you are considering a new supplier, check the company’s reputation with the Better Business Bureau. Paper pirates, as they are sometimes called by law enforcement officials, often telephone or visit small businesses to sell copier paper and office supplies that are overpriced and ultimately never delivered. Don’t buy from new suppliers without verifying their existence and reliability.
Monitor who chooses and works with vendors. As a business owner, it’s your job to stay on top of all aspects of your business, regardless of how much you may trust your employees. Make sure you periodically review the vendor selection process and ensure that the employee who selects vendors is not the one making all the purchases and payments. You don’t want to find yourself in a situation where an employee is paying himself or herself, instead of the vendor, and taking cash from your business.
Be wary of unusual invoices. Many small businesses are scammed by phony solicitations that come in the form of an invoice requesting payment for a directory listing. These official looking invoices are designed to mislead unsuspecting businesses into thinking that they come from a legitimate publisher. In many cases no such directory exists or, if it does, its distribution is typically very limited.
Train your employees to be on the watch for invoices with disclaimers. By law, an order form that looks like an invoice is required to carry a disclaimer in large type to the effect that, "This is not a bill. You are under no obligation to pay the amount stated unless you accept this offer."
Finally, be sure that those individuals making purchasing decisions know to be suspicious of callers offering bargains that must be acted on immediately.

The above was provided by the Wisconsin Institute of CPAs (, based in Brookfield.

April 4, 2003 Small Business Times, Milwauke

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