News and Trends

8 Ways Small Businesses Can Prevent Internal Fraud

Posted by IBS Marketing on Nov 16, 2021 1:24:57 PM

Fraud is all too common, and it should come as no surprise that small businesses are at risk. It’s also not surprising that the biggest area of fraud in small businesses occurs in accounts receivable departments. Because of the high number of opportunities for fraud in accounting, small businesses must put measures in place to prevent fraud. Being proactive against fraud is not just vigilant, it’s absolutely necessary to protect your business, profits, and reputation.

The impact of accounts receivable fraud can be severe. Not only can it completely wipe out a company’s finances, it can invoke lots of other damage, too. Recovering one’s brand reputation after fraud is near impossible because of the enormous breach in trust. We’ve seen big brands like Target and Equifax suffer from the consequences of data breaches. When it comes to small businesses, the impact can be even more long-lasting.

The question then is what can small businesses do to prevent fraud in accounts receivable? Just as our government has checks and balances in place to prevent abuse of power falling to one branch, so must a company set monitoring procedures. Having concrete measures in place, coupled with good old-fashioned intuition and common sense, as well as an open company culture that promotes transparency, can go a long way toward preventing fraud.

1. Know Your Employees

It’s sad but true: internal fraud is caused by bad employees. While everyone wants to believe they hire trustworthy employees, too often small businesses make hiring decisions based on their emotions. When it comes to business matters, it’s best to conduct a more thorough investigation. Following due diligence in hiring practices should be the protocol. And not only should hiring be fair and non-discriminatory, it should also be consistent across the board.

2. Stricter Background Checks & Hiring Practices

Background checks are critical, especially when hiring for roles in accounts receivable. If a potential employee has anything to hide, chances are, they aren’t going to come out and tell you during the interview process! This is why thorough background checks can be so valuable.

Aside from formal background and credit checks, rely on internal networks. These days many people are visible on LinkedIn, which gives employers a way to see mutual connections. Often you can find out about someone’s character through an objective opinion of a former coworker or manager.

After all if the employee has a background of fraud or a history of questionable behavior, it’s better to find out before the contract is signed, then after money goes missing.

3. Identify Suspicious Behavior

After employees are onboarded, companies still aren’t in the clear. Get to know your employees so you can spot suspicious behaviors in the future. Does someone keep making the same mistakes? Does another seem paranoid? Out-of-the-ordinary behaviors can run the gamut from highly engaged to checked out. Assess emotional signs as well. Is an employee complaining about financial problems or impending financial disaster at home? This could be a red flag that he or she is desperate… and desperate situations often call for desperate measures.

On the other hand, is your $40k salaried employee suddenly flush with cash? A brand-new car without a raise in years could also mean something is amiss.

Likewise, over territorial employees should be regarded closely. Does the person in charge of accounts receivable take care to be the only person who knows her job? If someone gets upset about having to share tasks, this could be a red flag that they have something to hide.

Acting too close and personal with customers might not be stellar service — it could be a sign that something is awry. If a customer is getting preferential treatment, what else are they getting behind the scene? Employees should be reminded to always keep business relationships professional at all times, so it’s even easier to spot unusual behavior.

While you don’t want to assume the worse, it’s important to stay observant — better safe than sorry!

4. Require Separation of Duties

Implementing internal controls is an effective way of safeguarding your company against fraud, including managing employees and their duties. Finance and accounting are key areas where letting an employee work for months or years, unchecked, can be especially dangerous.

Assigning different people different steps in accounts receivable when conducting cash transactions deters against one person holding too much power. For example, separating the tasks of writing checks and recording cash for credits and deposits can ensure one person can’t conduct fraudulent or fictitious business without anyone else knowing. Separating authorization, record-keeping, and asset custody is a common industry best practice.

For small businesses that cannot afford extra headcount, consider other measures of checks and balances. One way is by monitoring. Review and balance financial statements each month. Another is to implement rotation of duties. New eyes may discover new potential for fraud.

5. Enforce Mandatory Vacations

Another preventative measure small businesses can take against fraud is enforcing time off. Some workplaces may look down on employees who take vacation time, and in our era of hyper-productivity, it’s not unusual to want to prove value or loyalty by working around the clock.

However, never leaving work also gives fraudsters the chance to go unchecked for long periods of time, sometimes years, after thousands of dollars of damage has already been done.

Requiring employees to use their vacation time is not only good for workplace stress levels and overall morale, it ensures another set of eyes on business tasks to identify discrepancies. This is especially important for finance and accounting teams!

6. Set Up a Reporting System

While no one wants to come to work feeling like Big Brother is watching them, when it comes to corporate finances and security, it’s not worth taking any chances. The best reporting systems are the most successful when all employees are aware of risks and signs of fraud. A system where employees are truly vigilant depends on having an open, positive corporate culture.

Consider an always-open-door policy to encourage employees, regardless of role, to report suspicious behavior. The reporting system should be anonymous and incentivized to encourage people to come forward. Reward whistleblowers and stick to a steadfast no-retaliation rule should be made public to assure employees with information aren’t worried for their jobs.

7. Hire Experts to Handle Accounts Receivable

Probably the best way to ensure employees don’t use accounts receivable as their personal cash bank is to outsource these sensitive tasks to third-party experts. Hiring a firm like Internal Billing Service to handle finances has many advantages — first and foremost, ensuring your small business against the many types of accounts receivable fraud.

Outsourcing accounting to IBS can also solve such issues caused by disorganized in-house bookkeeping, understaffing, high turnover, and having to rely on outdated or under-optimized accounting programs. Handing over accounts receivable to IBS also promotes better customer relations and frees up time to focus on what’s important — running your business.

8. Promote Fraud Education & Awareness

Finally, knowledge is power, and therefore always your best defense. Not only should small business owners be well aware of the different types of accounts receivable fraud (and growing), their employees should be, too. Make sure everyone is up to date on your company’s code of ethics. Hold company-wide meetings and distribute literature to make sure everyone knows your policies on fraud. And work together to stay vigilant in the fight against fraud.

What have you or your company done to prevent fraud in accounts receivable?


Learn more about what Interstate Billing Service can do for you. 


Subscribe for Updates

Recent Posts