Fraud is an unfortunate, but all too frequent, problem for many businesses. You need to be vigilant lest a customer, vendor, or employee tries to skim, cheat, embezzle or otherwise steal your hard-earned money. The best way to avoid getting ripped off is to have strong systems and processes in place to prevent such larceny. Here are five steps you can take to help prevent fraud.
- Perform background checks on everyone who works with your business. Employees today have come to expect they will be subject to a background check before being hired. But clients, vendors and subcontractors? They may be less welcoming to the idea. But being thorough is a virtue which they should appreciate.
When delving into employee background look for criminal records, previous arrests for fraud or theft, and situations which might cause potential financial pressure, such as foreclosures, child support payments, evidence of drug use, or gambling problems. Your investigation should include a potential employee’s social media sites – it is public information and can reveal much about the character and habits of an individual.
When it comes to clients, suppliers and subcontractors, look for red flags like tax liens, lawsuits, legal judgments and violations. Scan the web for negative reviews of a business and visit employment websites like glassdoor.com to look for employee complaints.
- Double-check every invoice. More than half of all fraud occurs in plain sight through invoices that are inflated or faked. Vendors might overstate their costs or take excessive mark-ups. In order to know whether a contractor or subcontractor is defrauding you, it is helpful to have an accounts payable person with a sharp eye, as well as someone who can review questionable invoices to determine whether they are fraudulent.
- Get everything in writing. One way to deter someone from attempting to defraud you is to make it a policy that all transactions are documented, including a signature. If a vendor or employee knows they are going to leave a “permanent record” of their misdeed they may be less inclined to proceed. Plus, if fraud does occur you will have documented proof to help in legal proceedings. Too much paperwork? Better to be safe than sorry.
- Hire a compliance officer. Many companies have someone on staff who regularly conducts reviews and monitors business activities specifically to check for fraud. This includes analyzing payroll, monitoring contracts, verifying employee activities and managing relationships with vendors. A compliance officer could also be the “go to” person for employees to anonymously report fraudulent activity.
- Have the right financial systems in place. Avoiding fraud starts with thorough bookkeeping. Making sure all the numbers line up with expectations is the best way to spot irregularities that could indicate fraud is occurring. No check should go out the door without multiple approvals, and no invoice should be paid without being closely examined and matched up against a purchase order. These are common sense practices that are unfortunately missing at many businesses.
The cost of fraud comes right off the bottom line. It is well worth an up-front investment to have systems in place to identify and prevent fraud, and to help prosecute fraud if it does occur. If you think fraud may be occurring in your company, or for more information on ways to prevent fraud in your business, please contact Gray, Gray & Gray at (781) 407-0300.