Top Ten Fraud Prevention Tips for Small Businesses

By Diana Tyler, on April 5th, 2022

According to the Association of Certified Fraud Examiners, small companies are more likely to be victims of business fraud than any other size organization and the estimated median losses for small organizations that fell victim to fraud were $200,000 in 2018.

Ten Fraud Prevention Tips for Small Businesses:

  1. Create a culture of honesty, openness and assistance. Set a proper “tone at the top” for ethical behavior within the company. If your employees see you bending the rules, they will think it’s ok to do the same.
  2. Segregate responsibilities surrounding cash receipts. For ex: prevent the same person from opening the mail, receiving cash receipts, recording the receipt in the software program, reconciling the bank statement and having the ability to write off accounts receivable.
  3. Segregate responsibilities surrounding cash disbursements. The person paying the bills should not be responsible for approving invoices or accepting shipments of goods.
  4. Limit authorized check signers to owners or a key executive who is not involved in the accounting function. Do not give check signing authority to the bookkeeper. Do not use signature stamps. Require that supporting documentation (original invoices, receiving tickets, purchase orders) accompany all checks and review such documentation prior to signing.
  5. After signing the checks, mail them directly or give them to another employee to mail. Do not return signed checks to the bookkeeper, as that would create an opportunity for the check preparer to alter the check.
  6. Limit the number of company credit card users, limit the types of purchases allowable on company credit cards and establish spending limits. Consider setting up separate accounts for each card holder. Do not allow for cash advances on company credit cards. Request supporting documentation for charges.
  7. Review payroll reports regularly. Look for ghost employees, someone recorded in the payroll system but who does not work for the business. Compare pay rates to those most recently approved. Current pay rates should be documented in the employee’s personnel file.
  8. Perform background checks on new employees. This includes a thorough due diligence including checking with former employers and references.
  9. Institute mandatory vacations for all persons in a position of trust, including a requirement that someone else performs the vacationing employee’s job functions while they are out. Research has shown that employees who are committing fraud sometimes resist taking a vacation because they must remain on the job to cover up their fraudulent activities.
  10. Recognize and reward good job performance. Establish a positive work environment in the company. Make job training and promotion opportunities readily available to employees that fulfill certain requirements. Remember, happy employees reduce your company’s risk of fraud significantly.

This material has been prepared for general, informational purposes only and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. Should you require any such advice, please contact us directly. The information contained herein does not create, and your review or use of the information does not constitute, an accountant-client relationship.

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