Understanding Employee, Payroll and Payables Fraud
Get a group of entrepreneurs together in a room and chances are most of them, if not all of them, have been the victim of fraud. According to a report by the Association of Certified Fraud Examiners, about half of all small businesses encounter fraud of some type each year. Unfortunately, it costs these companies over $150,000 per occurrence on average. That is a lot of money to lose and it can be so devastating that it puts many companies out of business. These are 3 types of fraud to look out for today.
It’s a sad fact that a trusted employee is often the biggest offender when it comes to small business fraud. One minute they are reliable and appear to save the day, and then later you find out that they were stealing thousands of dollars from you. It’s a horrible feeling.
There are a number of methods of employee fraud, but most of the time it relates to a lack of separation of financial duties. For example, if the same employee pays the bills and reconciles the credit card accounts, then how you are going to know if they’re charging unapproved purchases on a company credit card? Not having an appropriate separation of duties means that you might not become aware of it until it’s far too late.
If your employees report their own hours without having to clock in on a machine, there is a high likelihood that someone is “padding” their hours. Payroll fraud is very common in industries such as construction or insurance, where employees drive around to different job sites unsupervised. How do you know if they were really at 3 different job sites in one day and worked those 4 hours of overtime? The only way you’ll know is if you check up on them sometimes to keep them honest.
Payables fraud is all too common and again there are many methods. For example, an employee may have a friend that runs a company, and that company might knowingly overcharge your business for services or products and give their friend a kickback for not reporting it to you. Another method of payables fraud is to over-order products and then return them for gift cards or cash. Use a merchant account provider that will partner with you to prevent fraud and immediately notify you of any unusual activity.
Running a business is hard, even when things are sailing along nicely, but when you’re an entrepreneur you must learn to hope for the best while planning for the worst. You need to be aware of every possible situation, including fraud, and take the steps necessary to keep it from harming your company. The last thing you need is to watch all your blood, sweat, tears, and money go down the drain because you were too busy to pay attention.
Business fraud is dangerous, and employees and customers are often the guilty parties. Learn to recognize the types of fraud that are common in small business and take steps to protect yourself before it’s too late.