The last thing a small business needs now is fraud.
Moderately-sized companies are already struggling enough in the fragile economy. Getting ripped off can be a crippling blow.
Fraud of American companies isn't pocket change: a 2008 survey by the Association of Certified Fraud Examiners estimated that U.S. organizations lose 7% of their annual revenues to fraud -- nearly $100 billion in 2008. The damage is the worst among small businesses, where the median loss suffered by organizations with fewer than 100 employees was $200,000.
True, the time and funds it takes to to prevent fraud can seem intimidating. But taking basic precautions and making a small investment early on can pay big dividends.
“Even though time and resources are scarce when you’re a small business owner, you should make fighting fraud a priority because, in a tough economy, you literally cannot afford to fall prey to scammers," says Alison Southwick, a Better Business Bureau spokesperson.
"Preventing and deterring fraud is much more effective than trying to recover losses after the fact. The economy is showing signs of recovery, but damaging fraud schemes can compound the financial woes of a struggling organization," adds Bruce Dorris, ACFE's program director.
So, what to do? Leaving aside employee fraud, here's a brief guide to protecting against outside threats.
The first step is to have a general awareness of common schemes.
Says BBB's Southwick: “Small businesses are not immune to the work of scammers and it’s important for owners to get educated and then share what they learn with their employees so they can identify and thwart any attempts to defraud your business.”
According to the ACFE study, check tampering and fraudulent billing are the most common small business fraud schemes.
To that end, Bank of America recommends eliminating paper checks: "The more checks there are circulating for your company, the greater the chance they may be intercepted, duplicated or manipulated by a fraudster." Use of an Automated Clearing House and direct deposit can help. "With direct deposit, you eliminate checks written to consumers for payroll, reimbursement and insurance," says BofA. "Both tools can help prevent criminals from gaining access to accounts and from altering or counterfeiting checks."
If you must use paper checks, create a lockbox. "If you have a hundred accounts sending you a check every month you have a hundred opportunities for financial fraud," notes BofA. "With lockbox, all checks are directed to a third party -- eliminating the fraudster's opportunity."
Even if customers are using credit cards, there's still plenty of schemes, especially when there's no physical plastic. "When a card is not present," warns Visa in a fraud prevention guide, "your fraud risk rises." Visa adds: "You could end up with lost revenue, higher operational costs, and potentially even your ability to accept payment cards."
Unfortunately, there are many more frauds out there. Some specific examples from BBB include "telephone relay" frauds; fake awards; and customers trying to snag free things. Entrepreneur.com has another round up on "heavy" pre-pay shipping; an overpayment scam; valuation fraud; and more. And Business.com has this summary of resources: Federal Trade Commission pamphlets on avoiding common scams; the SEC site; and the National Consumers League "Scams against Businesses" page.
Next, brace your business for the schemes. ACFE emphasizes being proactive: "Establish and maintain internal controls specifically designed to prevent and detect fraud."
A big part of that is training employees to spot it: "Do workers know the warning signs of fraud?" asks ACFE. "Ensure that staff know at least some basic fraud prevention techniques."
Another important step is securing data from hacking attacks. Visa estimates that approximately 85% of data breaches occur at the small business level (via < href="http://www.bbb.org/data-security/intro-to-small-businesses/">BBB), schemes that can both steal money and hurt customer confidence.
Says BBB's Southwick: “If a data breach strikes your business, not only can resolving the issue take an immediate investment of time and money, customer trust can take a serious hit and that will affect your bottom line in the long run as well."
The Bureau recommends "taking proactive, strategic steps to protect your customer and employee data -- and developing a plan for how you would respond should something occur that compromises that data." (There's a thorough step-by-step guide from BBB here.)
A critical step in fraud prevention is taking the time to check things out.
ACFE notes that high risk areas like financial or inventory departments are "obvious targets for routine audits" and recommends surprise checks of those and all parts of the business. A good checking strategy is the ACFE's Fraud Prevention Check-up guide.
Another tactic is establishing a fraud hotline. According to ACFE (via BofA), companies with fraud hotlines cut losses by approximately 50% per scheme.
Bank of America notes that speed counts, especially in electronic frauds. That means checking your online accounts often and notifying your bank -- and even law enforcement -- immediately. You may even want to hire one of ACFE's Certified Fraud Examiners if the attack is particularly damaging.
The implementation of anti-fraud controls can save you lots of money. Not convinced? The findings of the ACFE study showed that there were significantly lower losses with precautions in place. For example, organizations (including large companies) that conducted surprise audits suffered a median loss of $70,000, while those that did not had a median loss of $207,000.
So read up, put some basic precautions in place, and give things a regular sniff test. Who knows -- it might just save your small business.