Small Business Fraud Research


Small businesses often operate like families, with a lot of trust and responsibility among a small amount of people. While this is normal and can create a wonderful dynamic for the workplace, it also leaves small businesses increasingly vulnerable to fall victim to fraud. To protect your small business from fraud, we have described the most common kinds of fraud that small businesses suffer from. In addition, described below are factors that make small businesses especially vulnerable, red flags to look out for, and preventative measures to take to ensure the safety of your small business.

Kinds of Fraud: The following types of fraud are the most common for small businesses. Being aware and familiar with these terms and definitions can help both owners and employees prevent fraud.
• Payroll fraud – stealing money via the payroll system
• Cash theft
— “Skimming” – taking money before it is logged
— “Larceny” – stealing valuable personal property with high cash value
— “Fraudulent distribution” – allocating extra cash to undeserving/improper parties
• Financial statement fraud
— Online banking falsification
— “False invoicing” – sending seemingly legitimate invoices with the intent of fooling the customer, receiving payment from the customer, overcharging on invoices and pocketing the difference
— “Email invoicing” – similar to phishing scams, an invoiced email is sent that is fraudulent or fabricated under a familiar identity or vendor
• Assets misuse
— Stealing/misdistribution of stock/inventory

Poor business practices that make a small business vulnerable
• Having one employee with a lot of access/responsibility
— Example: Designating one person to take care of all payroll and other financial tasks, including posting transactions into the accounting software and being the person handling bank deposits and issuing/signing checks
• The staff being too familiar/trusting of one another
• A lack of record keeping
— Example: No audits or scrutiny by an outside CPA; little or no sign off systems or checking systems (internal controls)
• A lack of fraud recognition training

Red Flags
• If an employee is suddenly living above their means this could be an indication that they are committing fraud.
• Financial difficulty in someone’s life can motivate them to do desperate things. In the case of a small business employee, this can drive them to commit fraud for financial gain.
• Recent divorce/family issues, just like financial issues, personal trauma can cause people to commit fraud for financial relief or leverage.
• Excessive control issues on the part of an employee can indicate that they are committing fraud. Refusal to take time off or delegate responsibility can be an attempt to keep their fraudulent actions hidden.

Preventative measures small businesses should take
• Segregate financial responsibility
— Hire an accounting firm to handle some of the financial responsibility
— Do not grant total access without oversight
— Have your books, especially source documents such as check images and deposit slips, checked by a third party
— Keep personal and business banking separate
— As the owner, have statements sent to your personal email to avoid tampering and review and discuss “timely delivered” financial statements
— Establish a multi-person sign off system for expense claims, overtime, check writing, accounting payroll function, Audits
— Outsource formal fraud risk assessments
— Audit annually or have CPA review internal controls; conduct Internal and external audits
• Insure your business for loss from employee fraud and dishonesty
• Do not allow personal trust to create blind spots
— Restrict employee access to financial information or inventory/stock
— Conduct background checks on all employees and outside contractors/bookkeepers to ensure qualifications
— Outline and provide a clear employee code of conduct in your Employee Handbook
• Make sure employees take time off so that others can take over their responsibilities and check the legitimacy of their work
— This also refreshes your employees
• Fraud training: This can be outsourced through companies specializing in this type of training.
— Establish a fraud hotline for employees to report signs or evidence of fraud and establish a reward program for tippers as an incentive

Being an owner or employee of a small business that has a fraud problem within can be unsettling, but there are ways to prevent it from happening. Precautionary measures are the best way to deter and prevent fraud from happening while also keeping paranoia at bay. When small businesses suffer from fraud, an employee is not always the assailant, but maintaining strong controls minimizes a Company’s exposure. Your business will be safe and operational while maintaining a happy work environment when you adhere to the practices described in this blog! As always, at Mazur & Associates CPAs and Business Advisors, PC our goal is to protect you from this threat, including being the third party that you may always rely upon to reduce and eliminate fraud at your small business! Feel free to contact us for a consultation with one of our highly qualified CPAs and Business Advisors at or telephone (732) 936-1230.

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