In the second part of our series of business fraud, we’ll take a look at three more fraud threats facing your company, and what you can do to prevent them before they become a problem.
In the first part of our series, we looked at two key fraud threats facing many small business owners: transaction and payment card fraud and data loss/theft. As we suggested in the first installment, your first line of defence in a successful anti-fraud program is prevention: taking proactive steps to minimize your exposure and prevent loss before it occurs. It can be incredibly costly to track down fraudsters and recuperate financial losses associated with fraud, so prevention is always job number one.
Let’s have a closer look at three additional fraud threats and the practices you should follow to mitigate them:
Fraud Threat #3: Employee Collusion & Insider Fraud – One of the ways that fraudsters manage to breach the borders of your business is by colluding with staff members to perpetrate insider fraud. But whether insider fraud is perpetrated through collusion with an outside party or not, it’s a serious issue. No small business owner likes to think that a trusted member of the team is susceptible to this kind of criminal behaviour, yet it happens consistently and can go on at low levels for years before being detected. The recent economic downturn significantly increases the potential for this type of fraud as employees struggle to maintain standards of living.
What to Do:
- Limit Access & Monitor Behaviour – While no small business owner has the time to obsessively monitor employee behaviour, it’s a good idea to control the amount of access any employee has to key accounting systems or banking information. Checks and balances should be put in place to ensure that deposits are accurate and petty cash is reconciled on a regular basis. If managing inventory is a concern, ensure audits are conducted on a regular basis to prevent mysterious inventory fluctuations. Daily work behaviours should also be monitored for any sudden changes in pattern, such as schedule changes or irregular hours.
- Keep an Eye on the Middle Managers – Middle managers are potential sources of fraud: their position gives them a fairly high level of access to accounting systems and confidential information, yet their compensation is sometimes insufficient to fund their desired standard of living. More and more fraud is being perpetrated at this level, rather than at senior management or administrative/junior levels.
- Conduct Background Checks – If you can’t afford to hire an outside agency to perform background checks, ensure you do your due diligence before hiring anyone (even someone referred by a friend or colleague). References should be checked thoroughly and employee records should be requested and examined. Don’t simply rely on a prospective employee’s provided references: talk to business owners and/or HR managers. If using social networks like LinkedIn, be wary of glowing recommendations – these aren’t exactly the most objective measure of credibility.
Fraud Threat #4: Identity Theft – In this increasingly digital age, business owners have to worry not only about their physical paper trail (bank statements, financial records, receipts, credit card bills, etc.), but also their virtual information trail. We’re all somewhat lax when it comes to logging out of online banking sessions or other secure online environments. Keep in mind, if you step away from your desk it takes only a second for an employee or outsider to do a “screen scrape” of your computer (pressing the Print Screen key) to capture confidential data. In the physical world, even seemingly benign items like junk mail shouldn’t be ignored or disposed of carelessly.
What to Do:
- When in Doubt, Log Out – When engaging in online banking, always be sure to log out whenever you step away from your desk for any length of time. Although most sessions will automatically log out after a period of time, it’s good practice to never leave active sessions unattended. In addition, never keep a written log of your user names, accounts and passwords by your computer or in your purse or wallet – that’s an open invitation to potential identity theft.
- Choose More Than One Password – It’s getting increasingly difficult to remember multiple passwords for all the online systems that manage our business records and vendor accounts. So what do we do? We consistently use the same password over and over again, and fraudsters prey upon this memory weakness and exploit it. All it takes is your bank card number and a password or PIN to render you vulnerable to outside attacks.
Fraud Threat #5: Bust-Outs and Over-Orders – In this type of fraud, a seemingly legitimate business customer sets up an account with your company and, for a time, is a model customer: always paying invoices on time and placing consistent orders. Over time, the amount of the orders begins to creep up and their payment cycles start to stretch out beyond standard terms. Sometimes this is just a cash-flow issue, but in some cases they could be setting you up for a bust-out scam: a sudden, large order that they have no intention of paying for. This “customer” has earned your good will, and you might therefore be willing to trust them – don’t make that mistake.
What to Do:
- Monitor Orders Scrupulously – While a customer increasing their orders is potentially a good thing, keep an eye out for any sudden and dramatic increases that don’t seem to be associated with seasonality or high production periods.
- Keep Track of Payment Cycles – Your credit and invoicing systems should be set up to flag customers who deviate from standard payment terms or exhibit inconsistent payment behaviour. Don’t be left holding the bag on a final large order that a fraudster intends to sell through the black market, at flea markets or door to door.
While fraud should never be cause for panic or over-reaction, it behooves every small business owner to be aware, diligent and responsive – especially in a period of economic instability. Fraud attacks your most vital lifelines, threatening your financial viability and your business reputation. Undoing its damage can take months and years, so take a calm yet conscientious approach to stopping it in its tracks.