Updated in October, 2024
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. Often because they don't have systems or software in place that track financials, or give warnings when something isn't right.
For those businesses that fall victim, the effects can be much more drastic, especially with the shoestring budgets of the architecture or engineering industries.
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 to resources and assets, and any nefarious actions may be recurring. This can include stealing money, falsifying reports for time, travel, or other expenses for reimbursement, or taking the company’s physical property or supplies.
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.
Since small businesses are usually closely-held, these events can be both financially painful, as well as be personally hurtful to the business owners since the employees are often friends or members of their family.
Why are small businesses like A&E firms more vulnerable?
There are several reasons. A smaller staff means that individuals may perform several roles in the business, with little oversight (or even overseeing their own actions), and may have access to more aspects of the business like bank accounts or company credit cards. 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.
To further limit the potential for monetary theft, regular bookkeeping reports like Profit and Loss statements, Balance Sheet, Accounts Receivable and Account Payable should be sent to firm owners or a larger leadership team on a regular basis and reviewed together.
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 that takes some emotion out of the decision and has certain checks and balances in place.
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. As is following up with multiple references to check about work ethic and past behavior for any red flags. Dispassionately looking over resumes and conducting interviews can reduce the chances of hiring a person with fraudulent intent.
And make sure to build strong relationships with everyone on your team. Have regular one on one check ins with everyone you directly oversee to have a pulse of what they are doing and to build trust. Make sure everyone in the company has someone that is managing their role - even leadership team members should be meeting regularly 1:1 with someone else in the company.
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.
Software systems that manage financials and provide real time insights and data visualizations can also help limit the risk. Allowing the right people to have access to the reports and dashboards that show the financial picture of the firm limits the opportunity for things to go unnoticed.
4. Keep an Eye on Your Bank Accounts
Online banking is the standard for almost all firms, and it makes it easy to periodically review the business’ account activity. Business management should make a policy of doing so on a regular basis. At least once a week is best practice. Or if your accounts are synced with your firm management software it is easier to review your accounts even more frequently.
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.
Overall, flag anything that seems out of the ordinary and review these flagged items in more detail.
5. Scrutinize the Financial 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.
Reports should be set up to automatically be sent to the right people at your firm for review. Automation of these tasks will save you time but also give you the information you need to make decisions and increase your financial security.
6. Enlist Key Employees in the Fight Against Fraud
Your staff who oversee or are working in the most likely areas for fraud (cash management and payments) can help. Train them on the potential indications of fraud, and give them a method to report things they think are improper or out of the normal, 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 or theft.
Plus having more eyes on these ares can help. Firm owners are pulled in a million directions and have a ton of competing tasks on their plate. It is hard to have a detailed view of all aspects of the business so it is important to involve others to help ensure the success of the firm. This is true for risk management as well.
7. Protect Credit Card Data
Even owners of the smallest firms should keep business and personal finances separate. This is one of the most common mistake small business owners make, and it should be something to carefully plan when you start your business. This includes separating all financials, including all bank accounts and credit card usage. Co-mingling accounts is a poor financial practice that leads to confusion, 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 when filing taxes. As with any credit card, keep the information secure and pay via trusted methods.
Like with your bank accounts, review your credit card statements on a regular basis and flag any unknown expenses for further study. A good best practice would be to review all statements monthly prior to paying off the credit card balance.
8. Know Who You Do Business With
Your business vendors and consultants 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. Read reviews before deciding who to work with.
Ask your consultants how they handle invoices and purchase orders. When they process payments, and carefully read the terms and conditions of any contract. If anything is unclear, talk to them about it prior to entering an agreement.
9. Investigate Every Time
Don't assume anything is correct if you are unsure. 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.
Look into any red flags and follow up on any situation that doesn't look right. Trust your gut and verify anything that feels off. And talk about this with your staff. Let them know that they are an important part of the success of the business and that they should raise any issues they notice with the firm's leadership.
10. Ask a Professional
Small firm 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 architecture or engineering business from fraud and theft that could harm your firm and your financial wellbeing. Work with your employees to ensure you’re covered for all eventualities and make sure they understand how to protect the business against theft.
Learn more about how CORE can help keep your firm's financials organized and secure.
Firm management software like CORE can be an important tool in keeping your financial information organized and secure. As an all-in-one firm management platform CORE handles your accounting, firm management, time tracking, invoicing, e-payments, and more. Meaning you have access to all of your data in one place. Through automation, dashboards, and in-depth reporting CORE gives firm leaders easy access to all of the data and information you need to track expenses, process payments, and look into any situation that looks abnormal. The software shows you the business data in real time so the records are always accurate and up to date. Interested in learning more? Request a demo today and our team will walk you through how CORE can help your business.
