11 Steps to Prevent Business Fraud

11 Steps to Prevent Business Fraud

The potential for corporate fraud pre-exists the pandemic, and has been further exacerbated by it. According to a 2018 report by the Association of Certified Fraud Examiners (ACFE) the top 11 sectors impacted by fraud included manufacturing, transport and warehousing, technology, retail, health care, construction, professional services and food service/hospitality. More recently, the ACFE reported that COVID-19 offers the perfect storm for fraud activity to take place as the three factors that lead to fraud – pressure, opportunity and rationalization – all rise to the forefront.

Regardless of industry, small and mid-sized companies are particularly at risk. According to the 2018 ACFE, 40% of frauds occur in private companies and 38% of frauds in Canada are committed in organizations with fewer than 100 employees. One of the frequent causes of fraud in smaller organizations is the lack of segregation of financial duties. As profit margins are squeezed during the pandemic, this problem may be further amplified if companies look to reduce back-office staff and simplify procedures that may have played a role in fraud prevention and detection in the past.

The pandemic has been financially difficult for so many individuals and families. According to the ACFE, living beyond ones means (42%) and financial difficulties (26%) are the most common sources of financial pressure that lead to fraudulent activity. Who commits the fraud can come as a surprise to many business owners. The 2018 report by the ACFE found that in Canada:

The threat and risk of fraud will always be a consideration for business owners. How best can you protect yourselves and your businesses in good times and in tougher times?

Recommendations on Fraud Prevention and Detection

  1. Have a clear fraud prevention policy that all employees read and sign annually. Encourage employees to report suspected fraud activity. In the ACFE report, 32% of frauds are first detected by a tip and 64% of tips came from employees when employers provided a tip ‘hotline’.
  2. As matter of best practice, different people should be responsible for approving the bills, paying the bills and reconciling the bank account. When these functions are carried out by the same person, the risk of fraud increases substantially.
  3. The same segregation of duties principle applies to payroll to reduce the risk of paying a fake employee unknowingly, for example.
  4. Business owners should regularly review bank statements, other credit facility statements and credit card statements for any irregularities.
  5. Restrict access to your accounting software by job function. Each user must have their own login credentials so that all activity can be tracked with an audit trail. One ‘admin’ login account shared amongst all users is a recipe for disaster.
  6. Close the accounting cycle each month as soon as possible. This will remove the potential for a fraudulent activity to be buried in a previous period or year, making it more difficult to detect quickly.
  7. If your company size does not allow for easy segregation of duties, consider working with an external professional who can offer a monthly independent oversite of your transactions, reconcile the accounts, and review overall results with you for accuracy.
  8. Use technology to your advantage by maintaining pictures of all materials received, along with the invoice and who approved the payment, and compare that with the payments to ensure they match.
  9. Know your operations, people and suppliers. A tight-knit relationship between one employee and one supplier can be a red flag to keep an eye on.
  10. Regularly review your profit margins to ensure they are meeting your expectations. A failure to meet anticipated profit margins can be a major tip-off to business owners that something is amiss.
  11. Review overhead expenses on a regular basis to ensure they are in line with expectations.

Though the list above is not exhaustive, each of these steps can play an important role in reducing the opportunities that can lead to fraud. If you feel further consideration is needed to assist in protecting your business, reach out to a professional.

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