5 ways to fight financial fraud at your small business

Many small businesses become targets for crafty financial fraudsters each year, jeopardizing their hard-earned success. Though small business financial fraud cases may not be to the level of Bernie Madoff, financial fraud can devastate a company, eating away at its resources and credibility. Knowing the strategies scammers use to exploit small businesses can provide insight to strengthen your company against attacks. 

Understanding financial fraud

What is financial fraud? It’s the intentional act of deception involving financial transactions for the purpose of personal gain. This ongoing issue affects individuals and significantly impacts small businesses, which often don’t have the safeguards and resources larger organizations have.

Small businesses are especially vulnerable to financial fraud because of the smaller scale of their operations, making it more challenging to implement robust checks and balances. The consequences of fraudulent activities can be devastating, ranging from financial loss and damaged business relationships to a tarnished reputation and potential legal consequences. 

Common types of financial fraud that affect small businesses

As a small business owner, recognizing the signs and red flags connected to different types of fraud is crucial for early financial fraud detection and prevention. Here are some of the most common financial fraud crimes small businesses face.

1. Employee fraud

1. Expense report manipulation

1. Signs: Submitting reports often with high expenses in the travel or entertainment categories. 

2. Red flags: Making reimbursement requests outside company policy, lack of receipts or proper records, duplicate entries. 

2. Embezzlement

1. Signs: An employee suddenly increases personal spending without a particular reason, which often involves living way beyond their means. 

2. Red flags: Not interested in taking time off from work, financial records have inconsistencies, or inventory may be missing. 

2. Vendor fraud

1. Product substitution

1. Signs: Getting products that don’t match the original description or order specs, or products that are very low in quality.

2. Red flags: A sudden increase or change in pricing without explanation or inconsistencies in the labeling or packaging of products. 

2. Fake invoices

1. Signs: Getting invoices with mismatching logos and information or from vendors you don’t know.

2. Red flags: Invoices that don’t have the usual payment terms, contain the wrong information, or duplicate invoices.

3. Customer fraud

1. Fraudulent checks

1. Signs: Altered checks or checks that have name or bank misspellings. 

2. Red flags: Receiving checks from customers you don’t deal with or checks that have been pre-printed and have missing information.

2. Credit card chargebacks

1. Signs: Receiving chargebacks for products or services your business doesn’t provide or a sudden increase in chargebacks. 

2. Red flags: Orders with strange or suspicious billing information, addresses, or new customers who file a chargeback immediately. 

4. Account takeover fraud

1. Signs: Having difficulty logging into your online bank account or unauthorized transactions on your bank statements. 

2. Red flags: An attempt by a third party to change your account information or unusual activity outside normal banking hours. 

5. Check fraud

1. Check washing

1. Signs: Checks with signs of chemical washing or smudged ink with altered information. 

2. Red flags: Watermarks that look like they’ve been tampered with. 

2. Counterfeiting

1. Signs: Checks with poor printing quality or mismatched paper type or design; lacking the usual security features. 

2. Red flags: Pre-printed checks with missing information or blank payee lines. 

5 ways to fight financial fraud

Financial fraud has become an increasingly common threat to small businesses. But these five tips can help your small business solidify financial practices against fraud, ensuring the longevity and reputation of your company.

#1 Strengthen internal controls

Strong internal controls act as the first line of defense against financial fraud. By segregating duties, you can ensure that no single individual controls all aspects of a financial transaction at your business.

Keep things separate: Introducing separate roles for handling transactions and approvals makes it more difficult for fraud to go undetected.

Make reviewing a habit: Track your expenses by regularly reviewing bank statements and financial records to catch discrepancies early on.

Create a process: Having an established approval process for expenses and transactions ensures a clear record and accountability for all financial activities within your company.

#2 Leverage technology for enhanced security

Technological solutions offer advanced security features critical in fighting financial fraud. Using secure accounting software with robust user access controls prevents unauthorized entry and manipulation of financial data.

With Expensify, you get a secure platform that helps you fight financial fraud in your small business. Here are just some of the features to keep fraud at bay: 

• Enhanced transparency:

• Get streamlined receipt capture and categorization that improves visibility into spending.

• Realtime expense tracking means you get immediate oversight of financial transactions and avoid financial reporting fraud.

• Automated expense reporting creates clear communication between employees and managers.

• Reduced manual errors:

• Automated data entry via SmartScan for receipts minimizes human error during expense reporting.

• Built-in policy enforcement helps prevent expense category misclassification.

• Using a card like the Expensify corporate card helps you automatically track expenses, set spending limits for team members, and ensure spending habits match company policy. 

• Detection of anomalies:

• Expensify analyzes spending patterns and identifies unusual transactions and duplicate expenses for you in realtime.

• Customizable alerts help you flag discrepancies, especially for financial transactions like credit card fraud.

• Accounting software integrations simplify anomaly investigation – stick with the systems you already use but get better insights and up-to-date alerts.

#3 Educate your employees

Knowledge is power, so regular training sessions on fraud awareness can equip employees with the know-how for spotting red flags. These training sessions should cover various types of financial fraud, such as: 

• Phishing scams

• Identity theft

• Invoice fraud

Make sure your employees know the warning signs to look out for, like unexpected requests for personal or financial information, suspicious emails or links, or discrepancies in invoices or payment requests. 

Emphasizing the significance of reporting suspicious activities instills a sense of responsibility and vigilance among staff members, creating a collective awareness. Hence, everyone is a guardian of the company's financial well-being.

#4 Secure your business infrastructure

Securing the technical infrastructure of your business is critical in preventing unauthorized access to sensitive financial information. Strong password policies and multi-factor authentication reduce the risk of security breaches.

Also, ensuring that your company's Wi-Fi network is secure and that software used by team members is regularly updated eliminates potential vulnerabilities that fraudsters know how to exploit. Implementing strong firewalls and encryption protocols can provide an added layer of protection against unauthorized access. 

Some other ways to keep your business infrastructure secure: 

• Keep all software and applications up-to-date, regularly installing updates and patches for operating systems, antivirus software, and other applications. 

• Restrict access to financial systems and sensitive information through role-based access controls. 

• Use encryption for sensitive financial data, which scrambles the data in a way that makes it unreadable to unauthorized individuals. 

#5 Partner with a reliable and secure payment processor

Choosing a payment processor with an established record of robust fraud prevention measures provides an added layer of security to financial transactions. 

Look for one that uses encryption and tokenization, which enhances the security of financial transactions. Encryption scrambles the payment data so it’s unreadable to unauthorized individuals, and tokenization replaces sensitive payment information (like credit card numbers) with unique tokens. 

When using tools such as Expensify, your company benefits from secure payment features like address verification and CVV checks, further safeguarding against unauthorized transactions.

FAQs about how to fight financial fraud at your small business

• How do you prove financial fraud?

  A thorough investigation must gather evidence revealing intent, misrepresentation, and financial harm to prove financial fraud. This often involves analyzing financial documents, tracking the flow of funds, and gathering witness testimony. Digital footprints, such as unauthorized access logs and email correspondences, often provide essential evidence in building financial fraud cases.

• Which law provides rules related to creating financial statements to help avoid fraud?

  The Sarbanes-Oxley Act of 2002 (SOX) outlines strict rules for creating and handling financial statements for publicly traded companies to curb financial fraud. SOX was enacted in response to several high-profile corporate scandals to enhance corporate governance and restore public trust in the financial markets. The act imposes rigorous requirements on companies, including implementing internal controls and procedures to ensure the accuracy and reliability of financial reports.

• What do you do if you are a victim of financial fraud?

  If you’re a victim of financial fraud, act swiftly. First, notify your financial institutions to secure your accounts and prevent further unauthorized transactions. Next, gather all related documentation, such as bank statements or suspicious communications, and report the fraud to the appropriate authorities so they can launch a financial fraud investigation (like local law enforcement or federal agencies like the Federal Trade Commission). Also, consider getting legal advice or contacting credit bureaus if your identity is compromised. Lastly, analyze your current processes to identify vulnerabilities and improve safeguards against future fraud attempts.

Stay on top of your business expenses and avoid financial fraud. Give Expensify a try today by filling out the form below; we’ll take it from there.