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Identifying and preventing business fraud

There are two types of business fraud: internal and external. Internal fraud is committed by the people that work for you, like managers and employees. It happens every day, like if someone steals pens or post-it notes. But it can also sink a small business if an employee takes the bank deposits or steals your clients. External fraud is committed by outside entities like contractors and vendors who over-charge. Small businesses are susceptible to both but because of employee access to your business assets and records, internal fraud can be far more serious.

Eliminating business fraud is impossible. Therefore, the goal is to reduce your exposure and the opportunity to commit fraud. You can reduce your exposure in the following ways:

  • Divide up employee duties.
  • Audit checks.
  • Have an ethics code.

Employees can cause such serious damage because of their access to the business records and assets. You can reduce this by dividing up employee responsibilities. If one employee empties the cash drawers, then have another employee record it and a yet another employee deposit it. Unfortunately, this is cumbersome and impractical for most small businesses, so another way to control fraud is with the audit.

You should review business records on a weekly basis. Let your employees know that you regularly review records for accuracy. This doubly allows you to discourage fraudulent behavior and to catch it if it occurs.

It may seem redundant to draft an ethics code but laying out rules helps clarify what an employee can and cannot do. Most employees who commit fraud do not believe it is serious. Most business owners would like to believe that people have a moral compass that matches theirs. This code clarifies the situation for everyone involved.

If you were the victim of business fraud, then you may want to speak to a lawyer as soon as possible, especially if it was for a large amount. An attorney can walk you through the proper steps of how to deal with it, whether it is external or internal fraud. Remember business fraud is committed by average people who get in over their heads. But you can limit the chances of suffering a financial loss by focusing your efforts on reducing the opportunity to commit fraud and on limiting your exposure to it.

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