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Fraud in Small Business – Not a Question of ‘If’ but ‘When’


This article was originally published in the Terrace Standard on October 19, 2017. Reproduced with permission.

The threats of loss due to fraud come from outside sources as well as employees. With the wide range of attacks, a small business owner must ensure that proper internal controls are in place. The lack of internal controls provides opportunity for a small business to be victimized. When a business is small and growing, there is typically a lack of resources to install appropriate internal controls. There may simply be a lack of people for proper segregation of duties. Do you have the same person managing your books, paying vendors and reconciling your bank account? If so, there is a lack of segregation of duties and an opportunity for fraud to occur.

Small business owners tend to rely on their comfort level with their employees; placing a high amount of trust that they will not commit fraud. The reality is that when an employee is under financial pressure, a good person can make bad decisions. They will internally rationalize the decision by convincing themselves, on some level, that the action is okay or will be reversed before anyone finds out. Having appropriate internal controls will minimize the opportunity for an employee to commit fraud.

Implementing good internal controls and ensuring that they are being followed, sends a message to your employees and business partners that you are monitoring the finances so misconduct is more likely to be discovered quickly and reduce the occurrence of fraud in the first place.

Some simple steps that you can take to help limit exposure and loss to fraud are:

Ensure there is proper oversight and internal controls.

Focus on segregating duties where one employee has complete control over a business process.

Control and review the company’s banking records and credit cards frequently.

Watch out for any tampering by reviewing the cheques and statements for signs of missing, out of sequence, unauthorized or unusual cheques. Minimize cheque fraud by transitioning to electronic funds transfers with senior management or owner having final approval before payment is sent. Review corporate credit card statements for excessive, or non-business-related charges.

Perform routine and unannounced reviews and reconciliations.

Seek assistance to develop controls and processes that best fit your business and its unique risks.

Hire the right people and know your employees.

Perform background checks, verify employment history and consider obtaining credit and criminal record checks. Refresh these checks if an employee moves to a new position with greater financial access and control.

Demonstrate due diligence on the part of management by setting a good example and an ethical tone for the organization.

Management must adhere to the same processes and controls expected of staff. Avoid overriding the established controls.

Educate your employees in fraud prevention.

Education gives employees the confidence to identify specific concerns and can also improve efficiencies. If an employee does not understand why they are performing a control task, they may skip it and leave you vulnerable. Educate employees about external threats such as phishing emails and ransomware.

Do not dismiss your own suspicions, or your employees’ concerns.

Fraud is often committed by long-standing employees you trust. Trust is not a control.

Implement a confidential whistleblower program with supporting policies.

A high percentage of frauds are identified by whistleblowers. The program does not need to be complicated but it must be confidential and clearly communicated to all employees. Remember that recovery is difficult and sometimes not possible, so prevention is key.

Jacklyn Davies, CPA, CA, DIFA, is a partner in MNP’s Vancouver office where she leads the business consulting firm’s Investigative & Forensic Services team in British Columbia.

For more information, contact Jacklyn Davies, BC Leader, Investigative & Forensic Services, at 604.685.8408 or [email protected].