Most Common Frauds and How Small Business Can Prevent Them

Are you a small business owner with a misconception that fraudsters are not interested in your business? According to reports, 48% of small businesses in the US and Canada have this myth that they are not as vulnerable to online frauds as big firms.

But recent statistics deflated this myth and bore out the truth to small businesses. The report stated that in the US small businesses lost an average of $28,313.33 to online frauds last year.

Small businesses have to become smart enough to spot the fraud and take some preventive measures to protect their business from such unethical behavior, which can lead them to insolvency.

Here are some causes that lead to fraud in small businesses and the steps you should take to prevent them.

1. Cyber Fraud

The adoption of technology across the small business is increasing at a faster pace, which makes them more vulnerable to online fraud. Undoubtedly, small businesses are reaping the benefits of digital technology, but somewhere they lack the ability and resources to safeguard their business from frauds. And when a small business doesn’t have the ability to prevent or mitigate cyberattacks, the results could be devastating.

Small businesses not only face financial losses but reputational damage as well. The hard work to build their brands blows away in a few minutes. One of the common frauds among small businesses is Phishing attacks.

According to sources, it has doubled in 2018 to reach almost 500 million. Phishing attacks lures the user into opening an email or attachment containing malware. As soon as the attachment is opened, the user’s data gets compromised.

The Fix:

With the increasing awareness of technological frauds, 40% of small businesses begin to take preventive measures to protect their business. Starting from email verification followed by a third-party payment processor, banning fraudulent accounts, IP address tracker, and reconciliation of accounts.

Another option is to choose a cloud service provider to host your application and data. The service providers deploy advanced security safeguards like data encryption and multi-factor authentication to keep your data safe from cyberattacks and data breaches.

2. Card Payments

Well, now the trend of having a magnetic strip card is becoming increasingly popular across the world. However, fraudsters might remove this strip purposely to play the victim game and damage your business.

The moment you enter their long card details manually, it will reflect that the payment is made, but the deduction could be made from another account.

The Fix:

When you give the receipt to your customers for the goods or services they purchased, always check the last four digits of the card, and if there’s a mismatch, your customer is a fraudster.

3. Check Fraud

Check frauds are a common type of fraud that people commit more often than not. Either their check gets bounced or rejected by the bank, which costs SMBs thousands of dollars.

The most popular method is check overpayment, which means writing an amount on the check more than the agreed amount and then asking for the difference in change. Once you give the difference in change, the checks get rejected, and customer ceases all the contacts.

The Fix:

In the case of check frauds, you should add in your business policy that you will only accept checks from customers and suppliers, whom you trust. More so, keep the basic things in mind while preparing a check such as using an indelible pen when writing on the check and crossing through any empty spaces.

Ask for an alternative if you find that the check you received is wrong or customers write a greater amount than what was agreed.

4. Cash Fraud

Well, this is a traditional tactic that fraudsters generally apply. Detecting fake currency is always challenging for authorities and making currency notes that are impossible to copy is unimaginable.

In the US, counterfeiting currency is a widely attempted crime. According to the United States Department of Treasury, approx. $70 million counterfeit bills are in circulation, which amounts to 1 for every 10,000 original bills.

However, the numbers mentioned above are only an approximation, based on annual seizure rate on counterfeiting the notes. The actual value of the stock of counterfeit money is vague because some notes effectively circulate for a few transactions.

The Fix:

If you generally accept cash in your business, always consider checking the authenticity of currency.

5. Long and Short Firm Fraud

Long firm frauds often take place when a company earns a good reputation and credit history in the market. These companies begin by ordering a small number of goods with high frequency and pay wholesalers promptly. In this way, they win the trust of suppliers and establish a good credit history. After that, they order heavy goods in a greater quantity and disappear.

Small firm fraud is similar to long firm fraud, but here everything happens in a small time frame. They don’t try to establish their credit history; they just order the goods and disappear.

The Fix:

• Before taking a large order from a company with whom you’ve been dealing for a shorter time, do evaluate their trading history so far.
• Ask for trade references and check the legitimacy of referees as these fraudsters form their own fake companies to provide references.
• Take the initiative to verify the identity of office holders.
• Verify their home address whether it is similar to the documents they have provided to you.
• If you are dealing with a limited company; do verify whether they have field accounts and also make sure they have been primed by authentic reporting accountant.

 6. Occupational Fraud

There was a survey conducted in 125 countries, which includes analysis of 2,690 cases of occupational frauds that were investigated by Certified Fraud Examiner between January 2016 and October 2017. According to the data, there are innumerable companies that have been the victim of frauds once in business lifecycle with thousands of employees, regardless of their firm size.

These frauds were attempted by individuals who have been working virtually in every part of the organization, from entry-level employees to top-level executives.

So, let’s see how this occupation fraud is committed and steps that small businesses can take to mitigate such frauds.

1. Asset Misappropriations– This includes shoplifting inventory items or skimming from cash receipts.

2. Corruption – This includes bribe from suppliers, giving gratuitous discounts to friends and relatives, and selling sensitive information to competitors. It is representedas one of the major fraud risks for organizations in different industry verticals and regions.

Gaining insights into the various corruption schemes can help organizations to detect, prevent, and investigate such actions effectively.

Thus, it is recommended to keep a hawk eye on these red flags in corruption cases.

3. Financial Statement Fraud– Your in-house accounting experts, usually commit this fraud. They can easily create fake invoices and process the payment. According to the Association of Certified Fraud Examiners Reports (ACFE), small businesses suffer mostly due to internal theft.

The Fix:

Below mentioned are some smart steps that small businesses can take against occupational frauds:

1. Annual Financial Audits

Small businesses deal with a fewer number of people and limited revenue, so they are not motivated to conduct financial audits. However, this is one of the methods to uncover frauds in your business. Other procedures include surprise audits, employee support programs, fraud training for employees and managers, and instituting job rotation/mandatory vacations.

2. Reporting Fraud

Small businesses usually have a few employees on whom they trust blindly. Therefore, introducing anonymous reporting mechanisms, such as hotlines, are not adopted by small businesses. But it is recommendable to introduce such reporting tools in your office as it helps in fraud detection.

3. Internal Financial Controls

Small organizations don’t believe in having internal financial controls in order to safeguard their business from occupational frauds. As employees handle multiple duties in small businesses, it is easier for them to cover or destroy the audit trail that would disclose fraud.

So, small businesses should primarily focus on finding ways to detect frauds and have internal controls in place.

4. Get to Know the Method of Fraudsters

Knowing the methods that fraudsters utilize to shield their crimes can help businesses to design robust prevention techniques for detecting the warning signs of fraud.

8 cover up methods used by fraudsters:

• Created fraud physical documents – 55%
• Alter documents – 48%
• Create a fraud transaction-42%
• Alter transaction-34%
• Alter electronics files – 31%
• Destroy documents – 30%
• Create fraud electronics files – 29%
• Creates fraud journal entry – 27%

Bottom Line

According to reports, one-third small businesses didn’t have any strategy at place against such frauds. But with the changing market trends, small businesses are changing their attitude towards such fraud and taking robust steps to safeguard their business.

Thus, small businesses are now getting automated or hiring external experts to prevent their business processes against fraud.

About Author:

Avneet Narang brings more than 10 years of experience in digital marketing, branding, advertising and public relations to her role as a Marketing Manager at Cogneesol, a well-recognized specialized services company.

Note: The author’s views are entirely her own and may not reflect the views of Ace Cloud Hosting.