For a long time, the only thing a bad actor could cost you was the price of a theater ticket and popcorn. But these days the term “bad actor” has taken on a much more nefarious meaning, referring to someone who is deliberately acting to defraud or otherwise harm your business.
Fraud can be especially costly for small businesses. In 2022, companies with less than 100 employees accounted for 28% of all fraud cases and took a median loss of $200,000.* In this post, we’ll look at different types of fraud and offer you ways to protect your business against it.
Internal fraud
It’s an unfortunate fact that most cases of business fraud originate inside a company. There are several factors that can enable employees to commit fraudulent acts against their employer, including:
- Employees given responsibility across many facets of the company. This can enable employees to hide their actions.
- Too much unearned trust of employees. Without proper oversight, employees can be tempted to take advantage of their position.
- Inadequate security controls and processes for monitoring and recording finances and other transactions.
- Staff lacking in training on how to identify fraud.
What you can do
Conduct background checks
A candidate’s references and work history, while helpful, don’t always tell their whole story. A thorough background check (available for $30-$50 per report) can shed light on the dark corners of a candidate’s past. Of course, you should give the candidate the option of opting out of a background check (while noting that doing so will disqualify them from further consideration).
Limit who sees what
Giving employees access to too much of your company’s financial information can greatly increase your chances of fraud. Controlling access to your financials, on the other hand, can be a strong deterrent. If a situation arises where an employee needs more information, require that they submit a formal request for it.
Decentralize in-house bookkeeping and use an independent accounting service
Spreading internal accounting among several employees reduces the opportunities for abuse through collective accountability while employing an independent accountant to audit your books on a regular basis will provide you with critical external oversight.
External fraud
Not all fraud is employee based. It can also be the result of outside criminals looking to exploit weaknesses in your accounting protocols and other processes. The most common types of fraud originating outside of a company includes identity theft, cybersecurity attacks, tech support scams and submitting fake invoices.
What you can do
Protect your computers and network
Chances are that all of your business’s vital information, including transactions, bank account information, and other financial details, resides on one or more of your computers. Without proper protection, including a solid firewall and regular data backups that are kept offsite, it could be vulnerable to a hacking attack.
In addition, every employee who uses a computer or laptop should do so using their own unique username and be trained in how to identify potential phishing emails and other online scams. You should also implement protocols around passwords, and require employees to change their passwords on a regular basis, such as every 60-90 days.
Know who you’re dealing with
Similar to conducting background checks on employees, you should look into the background of new customers and vendors as well. This can be as easy as searching the company’s name online with the term “scam” or “complaint.” Also read what other companies have to say about them in their Yelp or Google reviews.
Verify before you pay any invoice
One common way criminals may try to defraud you is by submitting fake invoices. They’re counting on your accounts payable team to pay the invoice without verifying its validity. That’s why it is critical to have procedures in place for approving purchases and invoices. Make sure your staff is trained to check all invoices carefully. Also, unless prearranged with a vetted vendor, never pay an invoice with a wire transfer, cryptocurrency, or gift cards.
If you spot a scam, report it
Remember, two of the best ways to fight fraud are 1) an engaged workforce and 2) independent oversight. Instruct your staff and accountant to report any scams they may spot. Reporting it to ReportFraud.ftc.gov could help stop the scam. Also, you should alert your state Attorney General. You can find contact information for your state at NAAG.org.
*Association of Certified Fraud Examiners Report to the Nations: 2018 Global Study on Occupational Fraud and Abuse. https://s3-us-west-2.amazonaws.com/acfepublic/2018-report-to-the-nations.pdf