Accounting Fraud Prevention: 5 Tips for Small Businesses
White-collar crimes aren’t exclusive to large corporations. In fact, small businesses have proved to be more susceptible to occupational fraud and theft.
No small business owner wants to think that their employees would commit a crime against them; however, accepting that possibility and putting effective anti-fraud measures in place is crucial to protecting your company.
But what if you don’t know how to control fraud within your business? Below, we’ve compiled a list of five tips for accounting fraud prevention to get you started.
What is Accounting Fraud?
Before we jump into small business fraud prevention tips, let’s take a deeper look at what accounting fraud is first.
Accounting fraud refers to the act of deliberately altering business financial records to manipulate apparent health and/or conceal malfeasance. There are three types of fraud that you should look out for: asset misappropriation, corruption, and financial statement fraud.
Asset Misappropriation Fraud
Asset misappropriation is the most common type of occupational fraud and makes up 86% of all reported cases. An employee is guilty of asset misappropriation fraud if they steal or exploit resources from your company for personal gain. This typically involves:
- Skimming cash/check tampering
- Making false expense reimbursement claims
- Stealing non-cash assets from the organization
According to the Association of Certified Fraud Examiners’ (ACFE) 2020 Report to the Nations, asset misappropriation results in a median loss of $100,000 per incident—the least of the three fraud types.
Corruption fraud refers to dishonest behavior on the part of people in positions of power within a company (i.e., business managers and financial directors). These infractions include:
- Under-the-table transactions
- Defrauding investors
- Conflicts of interest
- Bribery or extortion
Corruption falls in the middle when it comes to both frequency and financial damage, occurring in 43% of reported fraud cases and causing a median loss of $200,000.
Financial Statement Fraud
Financial statement fraud occurs when an employee intentionally omits or misrepresents information in the company’s financial reports by:
- Misstating assets
- Overstating revenues
- Hiding liabilities or expenses
Although financial statement fraud is the least common of the three (10% of cases), it’s the most costly, resulting in a median loss of nearly $955,000.
What Risks are Associated with Accounting Fraud?
Accounting fraud presents serious financial consequences for small businesses, such as large financial losses, legal costs, and tainted reputations that can lead to complete downfall.
Being proactive and making accounting fraud prevention a priority in your daily operations can help you significantly reduce the risk of fraud in your business. Here are five anti-fraud measures that every company should take to increase their financial security.
5 Accounting Fraud Prevention Tips for Small Businesses
Small businesses (those with less than 100 employees) are most likely to fall victim to fraud and comprise around 30% of all cases. This is because they tend to have fewer accounting fraud prevention controls in place than larger corporations, making them more vulnerable.
1. Develop a Fraud Risk Policy & Response Plan
Don’t wait until fraud happens to address it.
No matter the size of your business, you should have a clearly written fraud policy and response plan. When creating the risk policy, be sure to include specific examples for each type of fraud and the consequences associated with them. You should review these rules with new hires and make them readily available for all employees to reference as needed.
2. Establish Strong Corporate Ethics
Deceitful behavior occurs far less frequently in companies that have deeply rooted corporate morals. But, how do you establish an ethical business culture?
Well, as the business owner, it begins with you demonstrating ethical behavior. This will have a trickle-down effect from senior management to all other employees. In addition to leading by example, you should develop a written code of ethics to explicitly state the moral tone of the organization.
People who work for ethical organizations that clearly define their moral expectations are much less likely to commit fraud.
3. Hire Trustworthy Employees
Because your employees have access to sensitive information and resources, it’s important to ensure that they’re trustworthy before hiring them. That way, you can feel more confident that your information and finances are in good hands.
When you have a promising candidate for a position in your company, take the time to contact their past employers to get a better sense of who they are. You can also ask applicants to provide character references that you can speak with before making a hiring decision.
In addition to being trustworthy, honest employees are your best line of defense against fraud. ACFE found that 50% of all reported fraudulent activity was detected by another employee. Therefore, it’s absolutely essential that you discuss accounting fraud red flags with your workers and set up an anonymous system for reporting suspicious behavior.
4. Implement Internal Controls
You may already have strong corporate morals and a clear fraud policy, but that doesn’t mean you’re in the clear. For optimal protection, you need to implement internal controls to prevent financial statement fraud.
Internal controls are the procedures and plans that a company has in place to safeguard its assets, ensure the integrity of its financial records, and deter fraud. Some common internal controls include:
- Limiting access to cash
- Invoice authorization
- General ledger verification
- Segregation of duties
- Internal/external audits
Without accounting checks and balances, fraudulent activities can go undetected for several months or even years. To effectively reduce the risk of fraud within your company, you must build a comprehensive set of preventative and detective internal controls that align with risk advisory best practices.
If you don’t have internal controls in place already (or your current controls need to be updated), you should hire a professional to assist with implementation.
5. Outsource Your Accounting
If you only have a few employees (or even just one person) handling your finances in-house, then you’re at an increased risk for fraud.
By outsourcing your accounting, your financial reports will be in the hands of a larger team of experts who are more likely to notice abnormalities and unusual patterns than someone internal. Outsourced accounting provides an extra set of eyes on the inner financial workings of your business, virtually eliminating the risk of fraud in your business.
Accounting Fraud Prevention from Powered by Centri
At Powered by Centri, our expert accounting advisors and HR advisors are committed to keeping your financial information accurate and safe so that fraud doesn’t derail your business goals. Let’s look at a few ways that our team can help solidify your small business fraud prevention.
We offer the following risk advisory services to help you manage and mitigate potential risk and compliance obligations within your organization:
1. Policy Development & Implementation
Our team is dedicated to understanding your business’s unique needs so we can evaluate and establish a risk response strategy that aligns with your objectives. Some of our services include creating and implementing the following anti-fraud measures:
- Corporate governance policies
- Information security and IT change management policies
- Accounting policy manuals
We have the foresight to anticipate future challenges and identify accounting fraud red flags before they become major problems, helping you stay ahead of any potential risks.
2. Internal Control Assessments
Implementing sound internal controls to prevent financial statement fraud is a key aspect of effective risk management. Our internal control risk assessments can help you identify, prioritize, and provide actionable solutions to manage your risks. We offer the following:
- Enterprise Risk Management (ERM) assessment
- IT Risk Assessments and General Controls (ITGC) assessment
- Develop processes, procedures, and policies for ESG services
- Sarbanes-Oxley Act (SOX) Compliance readiness assessment
- End-to-end business process evaluation
Your risk advisor will review the results of each assessment with you, discuss the current state of your company/industry, offer recommendations, and help you implement the new controls.
3. Forensic Analysis
We also provide an in-depth analysis for a variety of fraud schemes, including
- Cash handling
Your advisory team will also help you form a response plan if we detect any fraudulent behavior.
Putting all of your financial information in the hands of just one (or a few) employees makes committing fraud much easier—especially financial statement fraud.
By outsourcing your accounting to external experts, you can rest assured that the individuals handling your finances have your best interests in mind. Powered by Centri offers a suite of online accounting services from reporting support to strategic advisory.
Here are just a few tasks that your dedicated point person can assist with to reduce the risk of fraud in your business:
- Processing payroll
- Reviewing financial statement
- Creating monthly financial reports
- Tracking and maintaining inventory
- Cash management reporting
- Account reconciliations
- Coordination with external auditors
The upfront costs for expert advisory and accounting are far less expensive than those you could encounter if an employee commits fraud. Accounting fraud prevention is not something to skimp on.