10 Things you Need to do to Avoid Business and Employee Fraud

Businesses of all kinds tend to run into fraud, even more so now that businesses are going digital. The effects of these frauds can be extremely damaging for businesses. Compared to bigger businesses, small and mid-sized businesses can be vulnerable to fraud. These types of businesses can even shut down after a huge fraud. The types of fraud that businesses have to be aware of generally fall into three major categories:

  • Theft
  • Financial statement fraud
  • Asset misuse

These three fraud types make up the majority of fraud that businesses face in day-to-day life. The thefts either by directly stealing cash, claiming bogus expenses, or taking other property, are usually all carried out by employees. Most small businesses go through this, as almost all the employees are kind of like part of the family. As small businesses have limited staff, the employees and owners end up becoming close acquaintances and even friends. The other primary types of fraud that small businesses face are corruption, kickbacks, or fraudulent schemes. Any schemes that offer direct employee benefits personally can lead to fraud for businesses. 


The primary reason why small and medium-sized businesses face a greater risk from fraud consists of many factors. Employees in small businesses tend to take up several tasks at the same time, and the friendly relationship between owner and employee leads to a lower level of scrutiny. This excludes few formal oversight procedures, and less expertise on financial matters. Based on all these points, it’s essential for small businesses to take the necessary steps to prevent fraud, and detect it as soon as possible.

Tips to Prevent Business and Employee Fraud

1. Separate Accounting Responsibilities

As small businesses often have limited manpower, they have a single person handling several duties. There’s usually one person that always handles bookkeeping functions such as client receivables, processing payments, paying invoices, managing petty cash, and recording these functions in the accounting system. 


All this makes it easy for cases of cheating to go unnoticed, and businesses should have at least two persons handling these functions interchangeably. You should keep the handling of cash and accounting functions totally separate, or have these activities performed via a virtual CFO relationship with an accounting firm. 

2. Know Your Employees

The best way to prevent employee fraud is by hiring employees that you can trust. Background checks should be performed for all staff that deal with cash and sensitive information. As the employee’s level of interaction with money increases, the level of scrutiny should also increase. 

Although it may seem like employees committing cheat are also the ones that are trusted the most by their coworkers. The person who’s trusted the most handles several responsibilities at the same time. Reducing the level of stress on your employee’s shoulders can help in preventing employee fraud. 

3. Maintain Thorough Records

Small and mid-sized businesses need to create and maintain internal controls that can be used at the right time to prevent fraud. This includes restricting access to financial account data, inventory access, building a multi-person sign-off on expense reimbursements, overtime, and all check writing functions. Other steps include preventing access to payroll functions and performing an overview of audit logs to ensure the integrity of the books. 

4. Scrutinize Business Bank Accounts

With online banking options, it’s easy to view account activity and bank statements whenever a person wants, and business management should do this every now and then to make sure that the paper statements aren’t fake and haven’t been manipulated by the employees. 

The key items to look for are missing or irregular checks, unknown payment recipients, and checks that were signed to a third party instead of deposited in the business account. If your employees know that all the checks and bank statements are reviewed, there will be fewer chances of them conducting fraud. 

5. Audit Books Often

To prevent fraud, businesses should routinely audit areas that deal in cash, refunds, product returns, inventory management, and accounting functions. Additionally, sudden non-scheduled audits can also help in detecting hidden fraud in risky areas.

6. Train Your Employees

Another great way to prevent fraud is to train your employees in areas that are susceptible to fraud. If your employees know how to prevent fraud and how to detect and report suspicious behavior or actions by customers or other coworkers. Establishing an anonymous reporting system or process can also provide the boss with a certain level of calm. The management, including owners of small businesses, should create a code of ethics that makes it clear to the employees that no fraud or suspicious activity will be tolerated. 

7. Protect Credit Card Information

Credit card fraud makes the headlines all the time, and businesses also suffer from this. But businesses of all sizes, even the smallest home-based endeavor, need to make personal and business accounts. Combining personal and business finances can cause huge errors but can expose the individual to lost funds personally and commercially if cheating happens. Separating accounts is also great for managing finances. Businesses should also be wary of who they share their credit card information with and should use secure, online payment services, eliminating the potential for check fraud or theft. 

8. Know Your Business Partners

Before getting into a business relationship with another business, or individual, you need to know who you’re doing business with and how trusted they are. Knowing their physical address is a major deterrent to fraud, as is having alternate contract methods and persons, and references. 

Even a simple web search of a company should provide you with enough information as to whether they are really in business, and for how long. Additional resources that can provide background information include the Better Business Bureau and your local, state, or provincial government commerce department. 

9. Check Into Every Case

If you’ve set up fraud prevention steps and reporting procedures, but if you don’t check up on it every now and then, then you’re not following through on the security. To make sure that your business stays protected from fraud, businesses need to follow their own policies.

10. Leverage Technologies

The best way to prevent fraud for small businesses is to rely on technology. Technologies such as online document verification, online address verification, online KYC verification, and so on. These technologies can help in business verification, and employee verification, and prevent fraud.

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