Fraud poses a significant threat to businesses of all sizes, but small businesses are particularly vulnerable due to their limited resources and sometimes less sophisticated internal controls. The Association of Certified Fraud Examiners (ACFE) found in their 2024 Report that businesses with fewer than 100 employees had an annual median loss to fraud of $141,000 while businesses with more than 1,000 employees had a median loss of only $102,000. A major reason for this is that smaller businesses don’t have the same controls and procedures in place to protect themselves.
The first step to protecting your company is understanding the common types of fraud targeting small businesses. Here are five major kinds of fraud experienced by small businesses as well as some strategies to keep your company safe:
Phishing and Cyber Fraud
Phishing attacks target small businesses through deceptive emails, texts, or phone calls designed to trick employees into revealing sensitive information such as login credentials or even financial data. Cyber fraudsters may also use malware to compromise business systems and steal data or commit financial fraud. To protect against phishing and cyber fraud:
Educate your staff about the dangers of phishing attacks and provide training on how to recognize and report suspicious emails or messages.
Implement cybersecurity measures such as firewalls, antivirus software, and encryption to protect against malware and unauthorized access.
Regularly update software and systems to patch known vulnerabilities and reduce the risk of exploitation by cybercriminals.
Payment Fraud
Payment fraud involves criminals using counterfeit or stolen checks, credit cards, or online payment accounts to make unauthorized purchases or withdrawals. Small businesses are often targeted because they may have less stringent verification processes in place. To prevent check and credit card fraud:
Verify customer identity by requesting photo identification for large transactions or purchases made with checks or credit cards.
Use secure payment processing systems that encrypt sensitive cardholder data and comply with Payment Card Industry Data Security Standards (PCI DSS).
Train employees to recognize common signs of fraudulent transactions, such as unusual purchasing patterns or mismatched signatures.
Identity Theft
Identity theft occurs when criminals steal personal or financial information to impersonate individuals or businesses for fraudulent purposes. This can involve opening fraudulent accounts, applying for loans or credit cards, or filing false tax returns. To safeguard against identity theft:
Limit collection and retention of sensitive customer information to minimize the risk of data breaches.
Securely store and dispose of physical and electronic records containing personal or financial data, such as shredding documents and using encryption for digital files.
Monitor credit reports and bank statements regularly for suspicious activity and report any unauthorized transactions or accounts to the appropriate authorities.
Billing Fraud
Billing fraud occurs when external parties or even employees manipulate billing processes to siphon off funds from the business. This can involve creating fictitious invoices, altering existing invoices, or redirecting payments to personal accounts. To combat billing fraud:
Segregate duties to ensure that different individuals are responsible for creating, approving, and paying invoices.
Conduct regular reviews of vendor accounts and invoices to detect any irregularities.
Use accounting software with built-in controls such as approval workflows and audit trails to monitor billing activities.
Employee Theft
Employee theft involves employees misappropriating company assets for personal gain. This could include stealing cash or inventory, but could also mean using intellectual property or engaging in fraudulent expense reimbursement schemes. To mitigate the risk of employee theft:
Screen job candidates thoroughly before hiring and conduct background checks, especially for positions involving access to sensitive financial information.
Implement clear policies and procedures regarding acceptable use of company resources and conduct regular training sessions to reinforce ethical behavior.
Keep track of inventory using surveillance cameras, access controls, and periodic inventory checks.
Restrict access to sensitive information and intellectual property such as trade secrets
By understanding what kinds of fraud can occur and implementing controls and proactive measures to prevent and detect fraudulent activity, businesses can minimize their risk exposure and protect their assets. If you need help creating controls and organizing your accounting systems to help detect and prevent fraud, the team at Brightleaf Consulting Group has over 20 years of experience in putting accounting controls in place for small businesses of all types. Reach out and let us help keep your company on track.
- John Thrush