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The Loss Column

Some Practical Tips for Protecting Your Business from Fraud

Dawn McDonald

Dawn McDonald

It’s difficult to read a newspaper or watch a televison news report these days without seeing reports of consumer fraud and warnings about how to prevent it.

But oftentimes, businesses are the victims of fraud. Indeed, the instances of fraud against businesses have increased both in the number of occurrences and in the amount of money being lost.

The types of fraud vary from accounting scams perpetrated internally by employees to fraudulent returns from customers and data theft by outsiders. Businesses have less protection than consumers, and in some cases can be held liable for business fraud schemes or third-party data breaches.

To understand and prevent the many types of fraud to which your business may be vulnerable, you should first understand the different sources of these crimes. Most professionals agree that the sources of business fraud, ranked in the order of cost and frequency, are:

• Officers and employees. Small businesses tend to be more informal in nature, with fewer employees, which can result in a higher level of trust and a relaxed sense of oversight.

• Customers and clients. Customers can be notorious for trying to commit fraud against businesses by writing bad checks, using stolen credit cards, returning items not purchased, or filing fraudulent injury or liability claims.

• Vendors and contractors. Businesses can be the target of overcharging, overbilling, kickbacks, or failure to perform contracted work or services by unscrupulous contractors.

• Third-party attacks. A growing number of fraud attacks are being perpetrated by electronic means, including hacking, phishing (acquiring user names, passwords, or credit-card information), and identity theft.

Because fraud against your business can seriously impact the bottom line, it is important to set up and follow procedures to verify adherence to anti-fraud policies. Effective internal controls that create a system of checks and balances are some of the best fraud deterrents.

One of the most important steps a business can take is to create a system of awareness throughout the organization that makes it clear that the organization is watching for fraud and that, if caught, those involved will be prosecuted.

Methods for detecting and deterring fraud in your business include:

• Surprise internal and external audits. Many organizations have an internal audit department, but small businesses cannot always afford that luxury and need to work with their accountant to provide this level of control.

• Dividing responsibilities of accounting functions. Do not allow the person generating a purchase order to approve payment. Separate the function of check signing from the person who reconciles the bank statement.

• Employee tips and reporting. Develop an anonymous way for employees to report suspected fraud and work practices that could lead to fraud. Businesses that institute anonymous employee reporting detect fraud earlier and significantly limit financial losses.

Implementing a fraud-prevention plan requires time and commitment, but to minimize and manage risk, businesses are better off if they build in deterrents, establish good controls, and provide consistent oversight.


Dawn McDonald is a partner with Cooley, Shrair P.C., focusing her practice on assisting clients in the areas of commercial litigation, domestic-relations law, and labor and employment law; (413)735-8045; [email protected]