Fraud Prevention Strategies for Entrepreneurs and Small Businesses

Fraud occurs in companies of every size. But small businesses, especially new ones, have special risks because they generally can’t invest in expensive fraud-prevention programs. Thankfully, there are simple yet effective strategies that can reduce the likelihood of fraud, however small or new your company is.

Understand the risk

Fraud schemes can involve employees (occupational fraud) or third parties (including vendors, customers and cybercriminals). And sometimes, workers and outsiders collude to commit fraud. Fraud perpetrated by third parties includes identity theft, credit card scams, bank fraud and cyber-related schemes, including ransomware attacks. Occupational fraud usually falls into one of three major categories: asset misappropriation, corruption (such as bribery) or financial statement fraud.

Although these potential fraud threats may feel overwhelming, know that they all have the same objective: to steal your company’s cash or assets. Once you understand and acknowledge this risk, you can focus on shoring up your defenses.

8 simple ideas

Internal controls provide the best defense. If you lack controls, allow owners and managers to override controls, or are generally lax about employee oversight, your business is at higher risk for fraud. The following tips are a good place to start if you’re new to business and to fighting fraud:

1. Separate business and personal accounts. Using personal accounts for business is common with sole proprietors and new business owners. But it’s important to open separate business bank and credit card accounts as soon as possible. This will make it easier to monitor and report your business’s financial performance and help you detect unusual transactions quickly.
2. Take advantage of anti-fraud tools. Most banks provide a suite of anti-fraud tools to their small business customers. Some are free and others cost a monthly fee. Ask your bank to explain the pros and cons of each solution.
3. Regularly reconcile financial accounts. Set aside time at least once a month to review every bank and credit card transaction. If a transaction is incorrect or unauthorized, notify your bank or card issuer immediately.
4. Verify calls, emails and texts. Phishing and similar scams are just as likely to target business owners and employees as individuals. Be on the alert for calls or messages purporting to be from your bank or credit card issuers, the IRS or other official-sounding parties. Never click on direct links or provide sensitive information until after you’ve independently verified the identity of a caller or sender.
5. Educate employees. If you have employees, make them the first line of defense against fraud. Train them on the types of fraud schemes they could encounter and how they should report suspicious activities.
6. Make your presence known. Employees who commit fraud typically do so because they don’t think they’ll be caught. Keep close tabs on any employees you have, particularly if they handle cash, process transactions or work in accounting. Don’t hesitate to ask questions and investigate suspicions.
7. Invest in internal controls. Make sure you have policies governing inventory, shipping and receiving, sales, payroll and other functions that are prone to abuse. It’s not enough just to have controls — you also must consistently enforce them.
8. Deploy a cyber defense program. Anti-virus and anti-malware software are critical for protecting your business’s data. Install the latest software on every device (and update it as soon as updates become available), including on mobile phones.

Effective program

A fraud prevention program doesn’t have to cost a lot or take excessive amounts of time to set up to be effective. We can help you identify your business’s greatest threats and recommend simple, economical controls to keep fraud at bay.

© 2023