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small business fraud

How to prevent fraud in your small business


As much as you never think it will never happen to your business, fraud occurs more often than one would expect.  According to the Association of Certified Fraud Examiner’s (ACFE) 2012 Report to the Nations, fraud occurs in 31.8% of small organizations (those with fewer than 100 employees).  The report estimated that the median losses for small organizations that experienced a fraud was $147,000.

While most people would associate fraud with theft of assets such as cash or inventory, fraud can also occur by means of misreporting of financial information as well as through asset misuse such as unapproved use of company vehicle.  The ACFE report also indicated that the five most common fraud schemes were: billing fraud, corruption, check tampering, skimming and expense reimbursement fraud. Typically these forms of fraud occur when: an employee has control over too many processes allowing them to hide actions, staff becomes too familiar and trusted, there is a lack of formal procedures or staff aren’t trained to recognize fraud.

Here are some tips on how you can prevent fraud in your small business:

Segregation of duties

In order to establish adequate segregation of duties, an individual should only have control over one of each of the following:

  1. Asset handling and disposition- this individual’s duties would include cash handling, purchasing, payroll checks etc. They would not have access to post or change any accounting records.
  2. Recording accounting transactions- this individual records and posts transactions to the accounting general ledger.
  3. Review of accounting data- this individual reviews transactions appearing in the general ledger as well as reconciliations for validity and reasonableness.


At very least, if you only have one dedicated individual handling your accounting function, a separate individual should be handling the cash handling function who does not have access to the accounting records.


Establishing controls

The following are a few examples of controls that can be implemented to both detect (and help prevent) fraud:

  1. restrict employee access to financial account data
  2. limit access to inventory and use of other company assets
  3. establishing multi-person sign-off and approval for:
    1. expense claims
    2. overtime
  • cheque writing
  1. other accounting or payroll functions
  1. using audit logs or audit trails to track and trace all financial transactions


Cash review

With the ease of access to online banking, review of these reports is a simple way to monitor for unusual items.  As well, given the susceptibility to manipulation of paper copies of statements, we recommend looking at these online statements.

Key items to look for include:

  1. missing or out-of-order cheques
  2. unknown payment recipients
  3. payments made to unrecognized businesses or personal accounts


Hiring checks

While it may seem straight forward, background checks can help prevent inadvertently hiring higher risk employees from the get go. Check past employment, criminal record check, references, and legitimacy of education and certifications.


Conduct surprise audits

In order to keep employees on their toes, the understanding that surprise audits occur from time to time can be sufficient to help prevent fraud.  As well, an audit from time to time will help catch unusual activity as auditors perform specific procedures such as verifying cash balances and sample invoices.


Create a fraud policy

The policy should state that fraud is not tolerated as well as to let employees know what to do if they suspect fraud and the actions the company will take if they suspect fraud.  Given that staff are often reluctant to report suspicious activity, you may want to establish a fraud reporting hotline via a third party where staff can call in anonymously. This action will help engrain a culture of ethics and honesty.


Enforce mandatory vacations

One of the classic indicators of fraud is an employee that doesn’t go on vacation as they may be afraid their fraud will be uncovered in their absence.  Requiring employees to take time off can act as a fraud deterrent.

The information presented is only of a general nature, may omit many details and special rules, is current only as of its published date, and accordingly cannot be regarded as legal or tax advice. Please contact our office for more information on this subject and how it pertains to your specific tax or financial situation.


Tessa King White Kennedy Chartered Professional Accountant PentictonWritten by Tessa King – Manager
White Kennedy LLP – Chartered Professional Accountants