Common Small Business Frauds & Suggested Controls

Smaller businesses are the most vulnerable to some form of worker fraud as they usually place rely upon one or two people and therefore have fewer accounting and other internal controls.

The festive and holiday period is typically the time of year when many frauds occur as business owners frequently hand over control of various tasks in order to more junior or temporary staff members and they become less careful regarding monitoring procedures.

Statistically the most most likely person to commit a fraud such as embezzling money is a lengthy standing and trusted employee.

Business people can protect themselves by developing reliable accounting and other internal handles and constantly monitoring the effectiveness of these controls.

The most common frauds that are dedicated by employees including some suitable controls that should be put in place include:


Frauds that involve cash can be very costly for small businesses and perhaps can lead to the closure of the company. Examples include stealing cheques sent by debtors directly from the mail, forging an endorsement on a cheque, robbing cash from the till, and falsifying signatories and amounts on cheques issued by the business.

Suggested Regulates

* Separation and rotation associated with duties between cash/cheque handling, planning the banking records and recording in the general ledger.

* Having at least two persons sign most cheques.

* Performing regular financial institution reconciliations.

* Regular observation associated with employees handling cash or receipting debtors.

* Issuing pre-numbered statements for all monies collected and documented in the debtors ledger. This tells the customer that their money continues to be received and recorded.

* Day-to-day banking of cash and cheques and prompt recording of dealings in the accounting records.


Electronic banking is used more and more by businesses for payroll, supplier payments and transfers of funds between bank accounts. Whilst this is a more effective way of dealing with these types of banking dealings business owners often fail to implement appropriate safeguards.

Banks will not reimburse businesses from losses arising out of digital banking fraud where the business offers contravened certain conditions (e. gary the gadget guy. not keeping the password in the safe location).

Suggested Controls

* Having at least two persons say yes to all payments and transfers.

* Maintaining security over passwords (i. e. ensuring that they are input with out others observing, are not written lower and are changed regularly).

* Setting appropriate limits on the dollar value of transactions.

* Confirming security plans with the bank on a regular basis.

* Ensuring that bank authorities of terminated workers are removed immediately.

* Installing virus and firewall protection to reduce the risk of access by third celebrations.

* Ensuring that staff immediately remove any unsolicited or spam email messages that request the banking details of the business.


This is common where employees are not paid the same amount each week (e. g. shift workers and temporary staff) and the quantity paid is calculated on several factor such as the number of hours function units produced, or the volume of product sales.

Common techniques include extending the number of hours worked and type of function done on time sheets, manipulating the particular clocking on and off times where a time is used and artificially increasing product sales on which commissions are paid.

Some other common payroll frauds include inserting ghost employees on the payroll plus where employees lie about their own experience and qualifications

Suggested Controls

* Review and authorisation of your time sheets and clock on and off instances by a supervisor and/or manager.

* Requiring all overtime to be authorised in writing beforehand.

* Separation and rotation of duties between workers paying wages and recording within the payroll ledger.

* Paying workers by cheque or direct down payment into specific accounts as this could be easily traced in the event that a scams is uncovered.

* Obtain impartial verification of the qualifications of workers, check their references and confirm their experience from previous employers.

* Conduct regular performance testimonials personally on all employees which are listed on the payroll register.


This fraud involves the theft of physical assets (e. g. stock and plant and equipment) from the business and usually occurs where there are large numbers of little inventory items. Examples include false write-off of stock in the accounting information, altering the stock-take records, plus falsifying purchase orders or accounts to reflect the stock stolen.

Suggested Controls

* Limit entry to stock and items of plant simply by physical security particularly after hours.

* Independent authorisation of stock write-offs or scrapping of inventory items.

* Purchase orders crosschecked to the invoice and appropriately authorised.

* Separation and rotation of responsibilities in the ordering, receiving and documenting areas.

* Conducting proper plus regular stock takes using pre-numbered stock sheets.


These schemes attack the payments system of the business and occur as most obligations are made by cheque so there is limited scope to steal money.

A typical billing scheme involves the person creating a false purchase invoice from a fictitious business, or an accomplice business and then having this false invoice approved and paid.

Recommended Controls

* Separation and rotation of duties between the person making the purchase orders and submitting the orders for payment, the individual preparing the cheques and financial journals and the person recording the transactions in the accounting records.

* Invoices approved by one person and that person should not draw the cheques or have the authority to order products or services.

* Using pre-approved suppliers limits the opportunity of using a fictitious business to conduct the fraud. Any invoice from a supplier that is not pre-approved should be verified prior to payment is made.
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These frauds involve the person pumping up expense claims, making false or multiple claims for the one expenditure, or claiming a personal expense as a business expense. Whilst the quantities are usually so small to be observed individually they should not be regarded as minor as they can have a large cumulative impact on the business.

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