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Preventing Fraudulent Activities

Preventing Fraudulent Activities

As a small business owner, you constantly make decisions that could cause you to be victimized by fraud. When you hire employees, extend credit, or purchase products, you run the risk of being defrauded.

So what can you do? The key to keeping your business safe from fraudulent activities is to take concrete prevention steps. By creating standard practices and operating procedures and installing a series of checks and balances, you'll be able to perform due diligence sufficient to eliminate or at least reduce the chances of fraud – and in the process avoid unpaid receivables or employee theft.

Preventing Fraud – the Basics

Here are simple steps every business owner should take:

  • Perform extensive reference and background checks on all prospective employees. If you wish, ask for permission to perform a credit check. (You can run a credit check if the employee signs a waiver authorizing you to do so.)
  • Perform credit and reference checks on all businesses to which you may extend credit. Credit and reference checks are your best defense against fraud – and against offering credit to companies or individuals who are not in a position to make good on the debt.
  • Create a sign-off system for all invoices received. You may receive a fraudulent invoice requesting payment for services not rendered or products never delivered. Your accounting department is not in a position to know if those services or products were legitimately requested and received.
  • Require all purchases to be authorized by a select group of employees; do not grant blanket authority to all employees, even on a limited dollar-amount basis.
  • Make progress payments when possible. Instead of paying the entire amount up-front, break payments into portions
  • Sign every check yourself. Even some large companies require checks to be signed by the owner or CEO; not only will you better control the flow of cash but you'll also keep a better handle on the day-to-day activities of your business.
  • Set limits on purchase approval. Decide your "purchase pain" threshold, and limit purchases in excess of that amount to a select group of employees – or even to yourself.
  • Audit your checks on a regular basis to make sure no checks are missing.
  • Set up a checks and balances bookkeeping system. Have one employee or set of employees keep the books, and have a different employee or set of employees reconcile statements and accounts. In addition, make one person responsible for depositing checks, cash, etc., and another person responsible for reconciling statements and maintaining journal entries. In short, the accounting loop should never be "closed" or limited to one person.
  • Audit payroll records on a regular basis. Match time cards, work hours, etc., with payroll records in case there are "phantom" employees or overstated work hours.
  • Contact new vendors to verify purchases, contact information, etc. Don't assume a new vendor is legitimate.
  • Audit petty cash accounts on an irregular basis. Don't be predictable.
  • Immediately investigate if you suspect fraud.

The key to preventing fraud is to know your employees and your customers, and to create a system of checks and balances that ensures no single employee controls the flow of funds into and out of your business. Most frauds are successful – at least in the short term – because other people are unaware of what is going on. Put checks and balances in place and audit your systems regularly and you will eliminate most sources of fraud.


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