Financial fraud in your business can cost you a lot.

5 Ways to Spot Financial Fraud in Your Business

When you run a business, you hope that your employees will take pride in the work they do for you. But even the best bosses can find themselves with unscrupulous workers. And financial fraud in your business can undermine everything you’ve built over the years. 

Paying attention to your bottom line includes taking note of details that could indicate dishonesty or even illegal behavior. For help with tracking and accounting for your business financials, reach out to Fisher Bookkeeping. Our expert team offers full bookkeeping services tailored to your needs.

You Are Not Immune to Financial Fraud In Your Business

Every business owner would like to think that fraud won’t happen to them. And some owners assume that it only happens to mega-corporations, like Enron. 

But fraud is a common source of financial loss in companies of every size. The Association of Certified Fraud Examiners (ACFE) reports that globally, companies lose an average of about 5% of their revenue to fraud each year. This percentage amounts to trillions of dollars in lost money, and the perpetrators could be customers, employees, or executives. And this 5% falls heavily on specific businesses, not all companies, costing the impacted businesses millions.

Financial fraud in your business can be devastating.

Just because a company isn’t big enough to have shareholders and stock options doesn’t mean it won’t experience fraud. Fraud not only happens in any size company, but it’s particularly devastating to small and mid-sized businesses. In fact, per incident, companies with fewer than 100 employees suffer almost double the financial loss of bigger firms.

Fraud comes in many varieties, for example:

  • An employee generates false receipts and submits them for reimbursement.
  • An employer promises a future benefit, such as a promotion, to an employee for unreimbursed work.
  • A customer uses counterfeit money to make a purchase or steals something and returns it for a refund.
  • A manager records expected sales that have not happened as if they are current revenue.
  • An employee accepts bribes or kickbacks from a vendor for preferential treatment.
  • An employee sells customer data to a third party.
  • A bookkeeper who has control of the checkbook commits embezzlement. They literally have a blank check to commit fraud.

Any person working for or accessing your company has the potential to commit financial fraud in your business.  And as you grow and scale, the potential for mishandling of the money grows, too. 

Let’s look at five red flags that you, as the owner, should be aware of in your financials and employee behavior.

1. Account Inconsistencies

Account inconsistencies are a big red flag for fraud.

If you follow a Profit First method of accounting in your business, you are looking at bank accounts regularly. And even if you don’t follow Profit First, you probably see your statements each month, at least.

Pay attention to significant changes or inconsistencies in your accounting reports. For example, is there an employee who suddenly is having a lot of cash transactions? Or is there an unexplained surge in their expense book expenditures? Does a mostly inactive account suddenly have a flurry of activity?

Be faithful about looking through your monthly closing reports and examining your 12-month rolling comparison. These habits will help you spot financial fraud concerns.

2. Unwillingness to Share Their Work 

Businesses have to have a chain of command, and your employees must be willing and able to show their work and progress to supervisors. And they should be able to do so fairly quickly. 

If you have a worker who stalls when you ask for updates or reports or is secretive with their work or computer, you may have a problem. Most business data breaches, intentional or not, are due to an employee. So it’s vital that you have security measures in place for your employees’ activity.

Ideally, multiple employees are responsible for any given job or process. In fact, making sure that a task has more than one employee assigned to it is a key piece of avoiding the so-called Fraud Triangle.

3. They Can Drive For Miles And Miles

Financial fraud can include employees abusing their mileage privileges.

If your employees use a company car, they will likely deviate from the work route occasionally. 

Driving a mile or two off the path is common. But routinely racking up miles on their personal time costs you money in vehicle depreciation, repairs, and gas.

And if you have team members who drive personal vehicles for work, pay attention to their expense books. If your staff submits for mileage reimbursement that doesn’t match the work demand, there could be fraud.

4. They Disregard Other Rules

Do you have an employee who parks in the customer area or takes extra time on every break? 

A worker who openly disregards basic company rules is much more likely to take advantage of chances to line their pockets.

5. Other Employees Complain

Loyal employees far outnumber the ones who cheat or steal, and many will take action to protect their employers. In fact, small businesses learn about fraud due to employee tips close to 30% of the time. For bigger companies, that number is over 40%.

No matter the size of your operation, be sure to have procedures in place that allow whistleblowers to report without fear of punishment. This one step is crucial to any size of a company.

Protect Yourself

Background and credit checks can help you avoid financial fraud for your business.

There is no way to guarantee that you’ll never be a victim of financial fraud in your business. But you can take steps to protect your revenue and reputation, including:

  • Run a thorough background and credit check before hiring. An employee in financial distress is more likely to commit fraud.
  • Check their references. Not all fraud shows up in a background check because prosecuting the case takes so much time and effort. Many victims do not pursue legal recourse, so it won’t be present in a background check. Make those reference-check phone calls.
  • Do a social media check. How do they speak about former employers? Do they put forth a very angry persona? Do their posts tend to lay blame for their problems with others? If so, this may not be the safest person to hire.
  • Have clear and enforced standards of conduct for every employee in the organization. Be transparent about what is acceptable and make sure your staff knows that it is safe to bring concerns to their supervisors.
  • Purchase cyber liability insurance. In today’s online world, you should consider this type of policy. The protection and peace of mind it offers are worth every penny.

Consider cyber liability insurance to protect your business.

  • Close your books each month and compare to other periods. Look for trends and dig deeply into one or more accounts each month. This habit makes it more likely that you will recognize a problem when you do spot checks.
  • Include risky accounts such as mileage, meals, travel, and payroll advances directly in your closing package. You will be able to monitor those easily each month in the report.
  • Pay attention to your most-trusted employees. The intent here is not to turn you into a suspicious person. But the fact is that trusted employees are often the ones who commit fraud. So the more control and autonomy a worker has, the more you need to be vigilant about the money and data they can access.

Stay On Top Of Your Financial Information with Expert Help

You don’t need to handle every aspect of your business alone, so consider the benefits of outsourcing your bookkeeping. The experienced staff at Fisher Bookkeeping can help you keep your business finances healthy and in order. 

As Profit First coaches, we can also help you grow your profit so that you enjoy the fruits of your labor sooner rather than later. Contact us today for a free consultation. We have offices in Portland, OR, and near Lexington, KY, to help businesses all over the country. Reach out to us today!

About the Author Barb Fisher

Barb is the CEO of Fisher Bookkeeping, an outsourced bookkeeping consultancy that provides small businesses with a full-service financial department. Her favorite aspect of work is to break down the accounting to meaningful bits, so entrepreneurs can make a powerful difference in their own business. She's also a power lifter (squat: 215, DL: 270).

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