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Business Development

10 Steps to Reduce the Risk of Business Theft

For those businesses that fall victim, the effects can be much more drastic, especially with the shoestring budgets of the pandemic economy.


Even though larger companies may have more cashflow and staff involved in managing it, smaller businesses are as much as 35 times more at risk than large ones when it comes to business crimes such as theft and fraud.

For those businesses that fall victim, the effects can be much more drastic, especially with the shoestring budgets of the pandemic economy, but also when we start to emerge from it and businesses return to growth mode.

There are generally three major types of risks that fall into business financial crimes: Theft by employees, customers or vendors; Fraudulent bookkeeping/payroll; and Misuse of assets, including inventory theft. According to the Association of Certified Fraud Examiners (ACFE), the misuse of assets is the most common type of theft activity.

The highest risks are those committed by employees, since they have consistent access and the events may be recurring. This can include stealing currency, falsifying travel or other expenses for reimbursement, or taking the company’s physical property. Since small businesses are usually closely-held, these events can be personally hurtful to the business owners, as well as financially painful, since the employees are often friends or members of their family. 

Other fraudulent actions may include not recording sales while pocketing the funds, doctoring financial records, paying ghost employees, or other actions where an employee may be using their position to improperly benefit financially without regard to the effect on the employer, such as kickbacks from vendors.

Why are small businesses more vulnerable?

There are several reasons. Foremost, a smaller staff means that individuals may perform several roles in the business, with little oversight (or overseeing their own actions). Small business owners, managers and staff also often have close personal relationships that can result in less scrutiny, whereas a large organization may have strict, clinical processes that limit blind trust. Small business owners also generally have less experience with financial matters. 

Here are several steps that can small businesses or their accountants do to help prevent and detect fraud:

1. Separate Accounting Duties

With small staffs, a business may have only one person responsible for financial functions like receiving payments, billing, paying vendors, handling petty cash, and entering transactions into the bookkeeping software. This can make it easier for one person to commit fraud, and makes it harder to detect. 

There should be at least two unrelated people handling these functions, both with full experience on the accounting system, as well as with any use of petty cash. An accounting firm may also be able to provide the business with virtual CFO or virtual bookkeeping services to handle these processes or at least provide ongoing oversight.

2. Know Your Employees

In a small town, everybody may know everybody but most of us don’t live and run businesses in that small of a town. When hiring people the owner or manager hasn’t known all their life, there should be a clinical hiring system. If the role of the person will include handling cash or finances, or any role with responsibility over inventory and assets, a background check is necessary. Dispassionately looking over resumes and conducting interviews can reduce the chances of hiring a person with fraudulent intent. The bad guys don’t always wear black and have a sneer: Even the nicest job applicant can be a thief.

3. Implement Internal Controls

Internal controls can help detect and prevent financial fraud. Such controls can be simple processes such as limiting those with access to the company’s financial record-keeping and inventory management, requiring more than one person to approve or sign off for reimbursing expenses or processing vendor payments, approvals for overtime and other non-standard payroll requests, and two-person responsibility for petty cash management.

4. Keep an Eye on Bank Accounts

Online banking now makes it easy to periodically review the business’ account activity, and business management should make a policy of doing so on a regular basis. At least once a week. This can help ensure that no unlogged payments have been made, or payroll checks altered. When looking at bank statements, keep an eye out for missing check numbers or those processed out of order, payment recipients not in the business accounting system, and checks that may have been deposited into third-party accounts after having been signed over. This can be a sign of a fake vendor being paid, with the perpetrator then cashing the check. Having these steps and letting employees know about them can reduce the temptation to commit fraud.

5. Scrutinize the Books

Even small businesses should perform occasional audits of business functions that include cash management, refunds, payables, inventory and other financials. An accounting firm can easily assist with these functions. The ACFE has a Fraud Prevention Check-Up that businesses can use to identify fraud risks and develop controls.

6. Enlist Employees in the Fight Against Fraud

Staff who are in the most likely areas for fraud (cash management and payments) can help, so share with them the potential indications of fraud, and give them a method to report things they think are improper, whether those are actions by a coworker, customer or vendor. If the business suffers, they could lose their job, so it’s in their best interest to help prevent fraud.

7. Protect Credit Card Data

Even owners of the smallest businesses should keep business and personal finances separate, and this includes credit card usage. Co-mingling accounts is a poor financial practice that leads to honest errors and can complicate the process of finding not-so-honest errors. When it comes to credit cards, a breach of a personal card used for business and personal functions can badly disrupt both areas of the owner’s life, so keep them separate. Keeping business finances segregated also makes it easier to properly track business expenses and get proper deductions for them. As with any credit card, keep the information secure and pay via trusted methods.

8. Know Who You Do Business With

Your business vendors can have as much impact on your finances as your employees, so conducting a background check on them could be prudent. At the very least, before giving a line of credit or delivering a product that will be invoiced and paid later, make sure you have basic information such as a verifiable physical address, proper primary and backup contact methods, and business references. A basic Google search may be able to turn up much of this information, letting you know if they are fly-by-night or have been around awhile. You may also be able to check with the Better Business Bureau or a local business organization.

9. Investigate Every Time

If you’ve gone through the process of setting up even basic steps to prevent fraud and have ways for employees to report suspicious activity (discreetly or anonymously), then you need to actually do something if fraud/theft is suspected. Postponing action can compound the negative effects, or can give the fraudster the opportunity to better cover up the activity.

10. Ask a Professional

Small business owners who suspect, or know, they have a case of missing money, inventory loss or other fraudulent activity, but can’t quite find it, can turn to an accounting firm to help scrutinize their books and transactions. CPAs and those with the Certified Fraud Examiner credentials have experience in finding not just fraud, but other factors that may be causing a business to “leak” money.

By following these steps, you’ll be able to protect your business from fraud and theft that could harm your business. Work with your employees to ensure you’re covered for all eventualities and make sure they understand how to protect the business against theft.

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