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Take action against fraud

Small business fraud is increasing nationally and small businesses in Omaha are not immune. Within the past several years, there have been numerous convictions in Nebraska of employees who have made off with thousands and thousands of dollars from their employers. Unfortunately, small businesses and nonprofits can be good targets for fraud and embezzlement.

According to the Ponemon Institute’s 2012 Business Banking Trust Trends Study of small businesses (of which 80% of respondents had less than $20MM in revenues), 74% of respondents reported that their businesses have experienced online banking fraud. Of these incidents, 42% were perpetrated by employees and an additional 14% by vendors or suppliers. Furthermore, only 16% of these cases resulted in the full recovery of assets.

Michele Edwards, head of fraud prevention and detection practice of PRGX, contends that it could be happening to your business right now. Studies have shown that it typically takes two years from the time fraudulent activity begins to the time someone notices that it’s happening. Consequently, while some companies have already discovered fraud fueled by the recession, many more are likely to uncover problems in coming years. “I think there’s more fraud going on than anyone knows about,” Edwards stated.

A common belief of many owners is that their CPA or their bank can protect them. The reality is that while these entities provide valuable services and a level of protection, they cannot be a business’s only line of defense.

What can you do today to protect your business? First and foremost, resolve to do something different. Alarmingly, according to the Ponemon study, 49% of victims did not make any changes to their business practices or policies—even after being hit by fraud. The protection of your business and your employees lies with you. Here are three things you can do:

Make someone responsible for fraud prevention.

One of the quickest ways to get results is to give one person the responsibility and require frequent reports to company leadership.

Mix things up!

At CFO Systems, we help many small and midsize businesses through periods of acceleration, deceleration, or tough business cycles. We know that small businesses are lean and have limited staff. This often makes separating and sharing duties – a key fraud prevention policy – very difficult. So instead, occasionally shake up the responsibilities, particularly in the risk areas of writing checks and handling payroll. Have employees randomly switch task areas or have your sister or uncle come in to handle payroll or AP for one month. Schedule a surprise third-party audit to review the areas. Just knowing that these things may happen can prevent someone from ever starting a scheme. These may cost a little money and a little disruption, but as Benjamin Franklin once said, “An ounce of prevention is worth a pound of cure.”

Create a fraud hotline.

According to the Ponemon study, 40% of the reported fraud cases were discovered by outside vendor or supplier contacts. The Association of Certified Fraud Examiners recommends that organizations implement hotlines to receive tips from both internal and external sources. The most effective allow anonymity and confidentiality. In addition, employees should be encouraged to report suspicious activity without fear of reprisal.

Fraud can be devastating especially when it involves some of your most trusted and seasoned employees. Hard economic times and easy access to cash can be a strong temptation to even the most ethical of employees. These actions can protect your business and in many respects, protect your employees from, well, the devil inside.