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Six simple steps to preventing fraud in your small business

What comes in small packages is not always a good thing. According to the Association of Certified Fraud Examiners (ACFE), small businesses experience more internal fraud - and disproportionately larger losses due to fraud - than in larger organizations.

Employees can defraud a business in many ways. They can tamper with company checks, misappropriate equipment and supplies, or simply falsify expense reports. Whatever the scheme, fraud left unchecked within a small business environment can be the death of a company.

Small businesses are more susceptible to fraud than larger organizations because they often don't have auditors or appropriately staffed accounting departments to deter criminal activity.

"In a typical small business, there aren't enough employees to establish adequate internal controls; you've got one person handling the money from start to finish," says ACFE President James Ratley. "When you allow the same person who is authorized to write company checks to also reconcile the books, you're presenting an opportunity for that person to steal money from the business."

Moreover, Ratley says that a small business owner's expertise often isn't in running a business. For instance, a programmer might be a genius at designing software, but not know the first thing about managing company books or people. Therefore, the business decisions they make sometimes create ripe environments for fraud and abuse.

According to the ACFE 2006 Report to the Nation on Fraud and Abuse, which examined more than a thousand white-collar crime cases, the most common type of fraud perpetrated in small businesses was check tampering, followed closely by cash skimming, billing schemes, and expense report falsification. So, what can business owners do to ensure their companies don't fall victim to these schemes and others?

Exemplify the behavior you desire. "There's an old Chinese proverb that says a fish rots from the head down. If the owner is lax in his practices or standards, the employees will follow suit," Ratley says.

Set sensible goals. Be realistic about what your team can accomplish with the time and resources allotted. "If you set unreasonable financial goals, some employees will find a way to meet them whether it's ethical or not," Ratley says.

Know who you're hiring. Conduct detailed background checks on all new hires. Call former employers to confirm job titles and dates. Look for timeline gaps in the resume and ask for explanations. Have the candidate sign a waiver for a credit check and criminal records check. If you catch the candidate in a lie at any time, the interview process should end there, says Ratley.

Encourage communication. The 2006 ACFE report found that 64 percent of fraud cases were discovered through tips from other employees. Create an open-door policy so employees feel comfortable bringing issues to the table. "If a manager can help an employee with a problem - even if it's not business related - that shows loyalty and the employee will likely reciprocate."

Divvy up the duties. Do not allow someone with check-signing authority to also be the one responsible for reconciling the account. If staffing is an issue, at the very least insist that all checks must be signed by you.

Monitor the mail. Have unopened bank statements delivered directly to you or your home; this way, you are the first to review your company's banking activity. Keep an eye out for unfamiliar payees and atypical payment amounts or patterns.

"Small business owners take great pride in knowing and trusting their employees, but you can never be too careful," Ratley says. "A common factor that allows individuals to perpetrate fraud is that they have managed to gain the blind trust of their employers."