The ratio of fraud across businesses is getting miserable day-by-day, both in the number of cases and the ample of money that is being lost. However, according to researchers, small companies are more prone to frauds, and around 88% of the US companies reported that most of the scams were in the business finances. Why so?
Furthermore, employees performing accounting responsibilities in small businesses are usually assigned multiple tasks that may or may not fall within their specialized knowledge. Despite implementing a trust culture in the business environment, the probability of internal fraud is so very high.
So, small businesses must maintain a high-level of significant omission over their financial affairs. And need to prepare yourself to identify and act on the six most common fraudulent practices in the accounting procedures and scams that can plague your organization at the initial stage.
1. Fraud in payroll process-
Small businesses are more vulnerable to payroll frauds as they have less than 100 employees. According to researchers, payroll fraud happens 27% in all businesses and twice in small companies as they are unaware of the numerous policies related to payroll as per government norms.
Typically, small businesses face two kinds of situations that may lead to payroll frauds.
• In the first case, the employee might ask for advance pay giving you the reason of urgency and won’t pay the received amount back.
• In the second case, an employee might lie about working hours in their daily work-status reports.
Tip- It is advisable to gain appropriate knowledge of the payroll system and divide the responsibilities among bookkeepers. Ask them to mention everything about the employees including their leaves, vacations, payable salary, etc., in the monthly reports of bookkeepers.
Do check the background of the employee before you hire them and check their payroll accounts so you can spot early fraudulent actions.
2. Money Theft-
In small businesses, cash in hand can vanish in any way. Money frauds can happen under your nose without noticing you and your customers. Your employees might do skimming by faking the transactions in the accounting systems or books, or they might do larceny with your cash by reporting in the accounting books or some inappropriate disbursement by releasing the funds from safe in the absence of the owner.
These types of money frauds have an aggregated negative impact on the profits of the business.
Tip- Besides the motive of setting up a business, an owner needs to have a simplified cash monitoring process, both for an efficient financial method and also to maintain central administration of money within the company.
Moreover, you need to teach your staff, how to recognize a fake currency by analyzing micro prints, emblems, and color-shifting ink before accepting the money by a customer.
3. Net Banking-
Net banking has increased dynamically in the recent years, but it has also increased the fraud that occurs by transferring the funds to invalid accounts. Moreover, financial insights have become more prone to cybercrimes, so it is fundamentally vital for small businesses to prevent themselves from cyber-attacks.
Tip- Being a small business owner, you need to analyze the transfers are accurate or not. Talk to your banker about programs that can defend you from illegal transactions. Programs like Positive Pay and other services offer you callbacks, device validation, multi-person approval processes, etc.
You should also adopt some best accounting practices to safeguard your financial data from hackers. Take these points into consideration for protecting your online environment:
• Don’t use unprotected internet connections
• Encrypt sensitive data
• Update virus protection on your computer
• Make use of complex passwords and change them frequently
4. Incorrect Invoice process-
Inaccurate invoice processing is a growing fraud technique in today’s business world. Your CPA might add a more amount on the vendor invoice that will enforce you to pay them more. Being a small business owner, you don’t have enough time to go through every payment amount so you might end up paying in a rush to reduce your dues as soon as possible. Further, CPAs diverts the cash received from you in an alternative account.
Tip- You should have a necessary oversight of the vendor payments. Keep the list of vendors with you to cross-check the name of the suppliers to whom you need to pay along with the amount. This type of practice can intimidate your CPAs, and they won’t dare to perform illegal actions in your business.
5. Employees’ Benefit Fraud-
Employees’ benefit fraud is another common type of fraud small companies come across if they have employees. Many states in the US require that you should purchase employee benefits to compensate your employees if they become injured or get ill in the workplace. In this type of fraud, you need to be vigilant as the employee can claim that he/she got hurt at your workplace, but the truth is he/she got injured out from office premises.
Tip- You should check the employee’s document well. Maintain their records up-to-date and before paying them for claims do verify their injuries whether it is fake or genuine.
Small businesses have reported the losses they have gone through due to fraud in their industry is about $1,500,000. This kind of smashes can break the company anyhow. However, in such scenarios, implementing fraud prevention techniques can be a viable decision, but somehow, gathering the right tools and making massive investments is not possible for small businesses that are at the growing stage. Therefore, the most affordable way to secure your small business bookkeeping is by training your employees well on how honesty can pay them back concerning money and reputation.
Alika is a business development manager at Cogneesol- a leading online bookkeeping service provider. She is passionate about giving business advice and finding alternative ways to simplifying finance and accounting process for businesses. She likes to write on the latest development in the business industry and help entrepreneurs to grow in the agile market.