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10 Fraud Prevention Best Practices Start-up Entrepreneurs Must Know

03 Jul 2017

About 30% of reported fraud cases occurred in small businesses with less than 100 employees and 60% of those fraud victims did not recover from their losses that makes it increasingly important to have anti-fraud controls that prevent fraud risks.

The estimated losses of a typical organization is 5% of the annual revenues, reported by the Association of Certified Fraud Examiners (ACFE).
If you are starting a business or running a small business, what can you do to prevent fraud?
There are too many recommended fraud detection methods and best practices that may sound overwhelming. Some may not be practical or applicable to your business if you have less than 100 employees.
But you can start with 10 doable fraud prevention best practices.


1. Analyze transactions in your bank accounts

It is important that you know all your bank transactions. You should know when and how much money you put in and out of your account. 
Keep receipts of every transaction you make. 
The best opportunity to match your records with bank transactions is to analyze your monthly bank account statements. Carefully go over the details of your bank account transactions covering a specific period to check for any irregular activities such as debit transactions you did not make indicating illegal access to your account.

2. Analyze transactions in your credit card statements

Do you know how you are using your credit card? 
If your answer is no, then it’s time you should start analyzing transactions in your credit card statements. 
Credit card fraud, with online payment replacing the traditional cash transaction, is ever-increasing. The single best practice to make sure your credit card has not been compromised is to keep your transaction receipts for accurate records of the amount you spent using your card. 
On your credit card statement, match every transaction with your records and receipts. 
If you do not recognize any transaction, contact your credit card company immediately to investigate any unauthorized access to your card.
One of the things that is almost always overlooked is the prenote transactions. 
While most banks or any other online businesses you engaged with for authorized electronic fund transfer will most likely send prenotes, which is a zero-dollar transaction that tests the validity of your account; keep in mind that fraudsters have also been using prenotes to collect account information. If your credit card statement records prenotes transaction that you don’t recognize, report the issue right away.
It is also important to be aware that fraudsters are also using pre-authorization transactions. It is a transaction that secures funds for payment and validates the value of your card. 
On your credit card statement, analyze the pending transactions. If you are seeing pre-authorization transactions with businesses you do not recognize, it could be a hint for fraud that you should further look into immediately.

3. Generate reliable reconciliations

It is critical that you reconcile your bank account on a monthly period as soon as you receive your bank account statement. 
This procedure will help preserve the integrity of your financial records. For those of you using QuickBooks, you know for sure that it is a powerful tool that helps you reconcile your bank account in a fraction of the time you used to spend on reconciling your financial records.


If you are new to this bookkeeping software, the quick video below will show you how real easy QuickBooks works when you link your bank account that gets your transactions downloaded every night reflecting all service charges and ATM transactions in the system and make your task effortless in a snap.

4. Perform employee pre-screening

Do you know who you are hiring?
Whether you have permanent or temporary staff to help you run your business, employee pre-screening is critical to protect your business from being exposed to a threat. 
If you still think you want to save time and skip performing employee pre-screening before engaging your potential hire in tasks for your business, consider this statistics from the U.S. Department of Commerce
  • Repeated stealing inside the workplace is prevalent at 75%
  • Internal theft is 15 times more probable than external theft
  • Fraud and theft peaks losses at $4 billion annually
  • 30% of small businesses fail caused by employee theft
So what can you do?
Find time to validate the information in the resume of your potential employee. The time you spend in making sure that you are hiring the right person far outweighs the risks of fraud that could drag your business down to failure.
When pre-screening employees, verify employment history.
It is always a good practice to ask candidates the inclusive dates of employment for each company they previously worked for. During interview, you can ask about the candidate’s previous work experience in detail and call in the company for verification. The other things that you may need to verify include education, certifications, and trainings. While you’re at it, you may also want to check for civil and criminal records in applicable cases.

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In most cases, small businesses may not have the resources to perform all the legwork for employee pre-screening. 
That’s alright. 
You can always outsource this service that may prove to be cost-efficient for you. Either you hire a company who can conduct background investigation or you outsource staff from reputable companies known for their honesty and integrity in providing qualified staffing solutions that your business needs.
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5. Maintain internal control

Small businesses are faced with the big challenge to successfully maintain effective internal control. 
Technology, it seems have escalated the need for regular control, recommended even on a daily basis when possible, to reduce if not completely avoid the presence of risk that generally targets most small businesses with weak anti-fraud control systems in place.
But what could be the most effective structure of internal control for your small business?
There are multiple theoretical concepts and fraud risk management framework that may not even apply for practical reasons to all types of businesses. 
To determine whether you have an effective internal control system should be upon objective articulation of integrating these five important components:
  1. Control Environment 
  2. Risk Assessment 
  3. Control Activities 
  4. Information and Communication
  5. Monitoring
Internal control is founded on the control environment. 
We are talking about discipline and structure in your organization and factors such as integrity, ethical values, commitment, and other important code of conduct designed for your organization. The rest of the components are rooted in control environment.

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6. Segregate employee duties

It’s never a good a idea to empower one person with roles that authorizes access to incompatible duties such as a position to perpetrate and to conceal errors, according to the Institute of Internal controls advisors.
Segregate roles and duties among your staff. Segregation of duties (SOD) has been a long established method to prevent fraud but it has been a real challenge to maintain such practice for small businesses
You can simplify your SOD.
It is important that you understand the basic idea for SOD. The general ground is to authorize different people in accessing assets and responsibility. You should not assign one person to maintain full accountability of your business assets.
There are two key objectives for this practice. 
  • First, is to prevent asset misappropriation. 
  • Second, to prevent intentional financial misstatement. 
For effective internal control, this simple logical idea applies: implement appropriate segregation of roles that means there is distinct separation of responsibilities among staff that execute bookkeeping control procedures from those authorized to manage the assets.

7. Establish regular management analysis

Develop the regular habit of management analysis. This promotes ethical as well as transparent environment in your organization.
This is a key element for effective internal control
It is an opportunity to observe management behavior and achievements. It also aligns employees regarding their responsibilities and bolsters awareness about operational and behavioral expectations.
When you implement management analysis, you get a peek into the operational activities. At the first sign of questionable transactions or activities, you should further investigate raising red flag concerns; and more red flag activities could suggest fraudulent operation.

8. Develop code of conduct

If you have not thought about implementing a code of conduct among your employees, maybe it’s time you should. It provides an outline or guide for your employees to behave in certain expected ways.
While you cannot cover all grounds in developing your code of conduct, the core content should be relevant to matters about conflicts of interests such as insider trading, outside employment, as well as compliance with policies and regulations. These are the general things that employees should be aligned with for purposes of shared goals.
The code of conduct builds an understanding among employees about the expectations in their behavior and activities when it affects your business. 
They should understand and affirm their responsibilities to report fraudulent activities and to cooperate in the process of investigation. In failing to do so, there are associated penalties.

9. Hire third party bookkeeping for check and balance

Soon, you may realize the need for professional help from certified fraud examiners and financial advisors for you to fully understand what is going on in your business. 
They bring tested professional experience including all resources you may need for impending internal investigation.
Hiring third-party bookkeeping for check and balance will help you develop policies and procedures for fraud prevention. 
You may need professional perspective in designing structure and discipline on how things are done to improve your business performance and turn risks and compliance efforts into opportunities for developing winning strategies. 
FAS may be the perfect match to deliver the bookkeeping services you need with confidence in the values of integrity and honesty.

10. Perform regular fraud risk assessment

Every business has a legal duty to their shareholders to take care of their business. 
It is important to understand that if you are running a business, you are subject for compliance based on professional standards and regulations. 
That said, you may need to perform fraud risk assessment periodically. This practice helps you identify potential fraud schemes and activities that may require mitigation.
There are three general key elements to fraud risk assessment:
  1. Fraud risk identification
  2. Assessment
  3. Reasonable response
You should be able to consider all types of fraud risks that may apply to your business. Then, you can assess these risks to come up with an appropriate response that addresses these risks to your business.

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