Fraud is a fact of life, but despite that reality, I continue to find clients who "trust" that their company is free from fraud, even without any controls in place to verify whether that's true. It's clear that many businesses don't take fraud as seriously as they should, and in part that may stem from the false impression that preventing fraud is difficult or may send an antagonistic message to workers.

However, fraud prevention is a core component of any company's operations, and I believe it should be treated as such. Here's what you need to know to get started.

Fraud Statistics

In its 2016 Global Fraud Study, the Association of Certified Fraud Examiners (ACFE) revealed that the average company loses about 5 percent of its revenues every year due to fraud. The total loss by cases in this study exceeded $6.3 billion, while the median loss for any individual company was $150,000.  However, 23 percent of companies which experienced fraud had lost $1 million or more, a devastating amount for all but the largest organizations.  Asset misappropriation was by far the most common type of occupational fraud.

The ACFE further points out that while small businesses risk losing less than the biggest enterprises, their overall rate of fraud is usually higher. In companies with fewer than 100 employees, it can be easier for fraudsters to hide their activity, and small companies often have very weak anti-fraud procedures — if they have any at all.

Clearly fraud is a big risk, but there are a few relatively simple steps you can take to prevent it.

General Steps to Combat Fraud

I'm continually shocked to discover that many clients have no internal anti-fraud procedures in place, but it's a fact for many companies. When you're starting from zero, any steps at all can have a big impact on reducing your risk for fraud.

The most important first step is to establish lines of communications that allow employees to report suspected fraud. While bigger companies are subject to fraud hotline regulations laid out in the Sarbanes-Oxley Act, smaller organizations can often make do with a simple anonymous phone number or message dropbox that employees can confidentially report to.

Secondly, anti-fraud training needs to be a regular practice for all your employees, even if they're not directly involved in accounting or bookkeeping.

Finally, all your financial and accounting data should be reviewed regularly, ideally by neutral third parties who have no connection to your financial staff.

Preventing Fraud With QuickBooks

QuickBooks' ease of use is also the reason it's such a gift for fraudsters, especially in small businesses. Fortunately, the QuickBooks developers have added a variety of anti-fraud tools over the years, and you should definitely be making use of them.

The QuickBooks Audit Trail Report is all but mandatory, since it reveals how your financial data has been used, when it's been changed and who changed it. This is important, since altering records after the fact is a common method for hiding fraud.

The Missing Check Report is a similar tool that focuses on providing an audit trail for all checks that have passed through your organization. The tool will spotlight any missing check numbers, gaps in sequential payments and other common signs of fraudulent activity.

Using the Bank Reconciliation function every month allows you to find any entries that have gone unreconciled for an extended period, which may indicate that a fraudster has intentionally left those entries unresolved to hide fraud.

Regularly reviewing your vendor list is also important, as it can reveal whether phony vendors have been created to be used for fraudulent payments that are then diverted to other accounts.

Finally, User Access Privileges are a vital component of QuickBooks fraud prevention and allows you to segregate financial work to guarantee that no single employee has access to enough information to easily commit fraud.  Of course, in small businesses, you may have one bookkeeper who basically handles everything, so segregation of duties is not possible.  Therefore, it becomes more important for you, the business owner, to stay on top of your financial records.  Becoming familiar with and using these tools can help you to do just that.

While no company is 100% immune to this threat, putting small and effective measures in place can certainly reduce the risk of fraud. My colleagues and I have personally uncovered fraud in our clients' businesses. Please contact GPP if you would like further information on fraud detection and prevention.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.