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Already hard-hit by the pandemic, a fraud-related loss is something few small businesses can afford. But it’s an ever-looming threat for small businesses, with organizations of under 100 people accounting for 28% of all fraud cases at a median loss of $200,000.
What makes it worse is that fraud within small-to-medium businesses (SMBs) more often than not comes from your tight-knit employees. To avoid a world of hurt, you need to know how fraud could happen in your business and how to detect and prevent it.
The most common causes of fraud in SMBs
Employees who handle the bookkeeping are the most likely to commit fraud in SMBs, as they have the oversight and understanding to play the system. However, it’s worth knowing owners and executives make up 29% of fraud cases, too.
Regardless of who’s committing the crime, these are the specific circumstances that make it possible:
- Employees perform multiple functions within the business, allowing them to hide their actions.
- Staff are too trusting of each other.
- A lack of security tools, processes, and controls means things aren’t monitored or recorded.
- Staff lack the expertise to recognize fraud.
But this doesn’t mean small businesses should accept their fate and chalk fraud up to the cost of doing business. Nor should the staff who make up the business be constantly suspecting each other.
No, small businesses can prevent fraud with just a few tweaks to their software, signatures, and behavior – bringing peace of mind for everyone. Here’s what SMBs can do…
How to detect fraud in your business
Before you can prevent fraud, you need to know if it’s happening. Here’s how you can spot fraudulent behavior in your business.
Review information frequently: If you’re a small team and everyone has access to financial information, it’s important that bank statements, bank reconciliations, and vendor payments are independently reviewed every month to catch anything that might be out of place.
External oversight: Using an external accountant or firm for oversight and support to review your current accounting controls, workflows, processes, and activities will quickly weed out any questionable activity.
Break your accounting routine: One sure-fire way to detect ongoing fraud inside your business is to break your accounting routine every now and then. Business owners can do this by insisting bookkeeping employees take a holiday during the time the books are usually closed. By completely removing control over bookkeeping and adding a fresh pair of eyes to the process will likely bring any questionable activities to light.
Controlling the flow of information is key
Appropriate controls over your financial information and activity are essential to protect yourself against fraudsters – as much as 42% of SMB fraud comes from a lack of internal controls. Putting them in place is not as hard as it sounds.
Control financial information: Limiting employees’ access to financial account data so they can only see essential information and activities can significantly reduce the chances of fraudulent acts. If employees need more information, they can always ask for it. Total control by default, though convenient, is a privilege waiting to be abused.
Use multi-person sign-off: Just like access to information, establishing a multi-person sign-off process for finance-related activities – expense claims, overtime, and payroll functions among others – will give you an extra layer of security that can help to weed out suspicious activity and bad actors.
Decentralize accounting duties: Sharing accounting duties with more than one team member creates collective accountability. When accounting is controlled by a central figure, it’s easy to manipulate and falsify financial statements with no accountability.
By spreading out your accounting duties like recording and processing transactions, sending out invoices, collecting cash, and making deposits across a group of people, it becomes harder to act fraudulently unnoticed.
Maintain a tamper-proof paper trail with eSignatures
Fraud, and embezzlement in particular, requires paper trails to go undetected. A common scheme is to create fake vendors and manipulate bank statements and invoices with software to make transactions look legitimate before printing and filing them for review.
However, with today’s technology, you can make this manipulation much harder on criminals.
Any worthwhile eSignature tool comes with built-in audit trails that ensure any action on an electronic document is thoroughly tracked and time-stamped, so you know if it was ever modified or tampered with without your knowledge.
Advanced tools will even use hashing technology. This provides a “copy” of every version of the document which you can use for comparison should a questionable version ever appear.
Despite the financial security layer eSignatures add, there’s still a misconception that they are less secure than traditional pen-and-paper signatures. When it comes to protecting against fraud, eSignatures are actually much more secure than analog signature methods due to their anti-tamper nature.
For instance, HelloSign protects all of its documents in a certified data center. Access to the data center is strictly controlled by security staff equipped with video surveillance, multi-step authentication, and state-of-the-art intrusion detection systems.
Don’t get caught out by fraud
Although fraud is a real threat to small businesses, that doesn’t mean you can’t protect yourself.
Though there’s no one-size-fits-all solution for small businesses that will protect every business from fraud, the processes and technologies above will certainly help.
HelloSign is helping SMBs protect themselves against fraud with eSignatures.
This post was created by HelloSign with Insider Studios.
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