February 03, 2023
Avoiding Fraud, Theft and Overcharges
Misdirected checks, unauthorized credit card usage and fake invoices are among several risks that small business owners should be aware of when reviewing their finances.
When recession risks grow, normally that can lead to lower profits for businesses. For business owners, if your profit margin is razor thin or nonexistent, you sure can't afford to lose funds to fraud, theft or overcharges. Most business owners I’ve met don't think about those risks until after they have a problem. As an auditor for over 25 years, I observed dozens of ways that people steal and commit fraud. Part of my job was to help business owners design controls to safeguard their assets. Here are some common things to watch out for and ways to prevent them from happening to your small business.
Unauthorized credit and debit card use. This is a common problem when your employees are running around with company credit cards. They buy $400 worth of legitimate business supplies at Costco on the company card, plus an extra $100 worth for themselves. As a control procedure, you should examine all credit card activity monthly, or maybe even weekly, to make sure it all looks legitimate. However, some of this fraud can only be discovered at the invoice level. Make sure there are receipts or invoices to back up all credit card and debit card charges, and spend a little time reviewing those. If you see something questionable, start making phone calls.
Hacked business debit card transactions. Besides employees, you have to watch out for criminals that swipe your debit card number and start buying things. I’ve learned the hard way that banking laws provide almost no protection for business debit cards. Any restaurant, gas station or retail store in which you have used your card may have a security breach that puts your whole business account balance at risk. The fraudsters simply use a fake business name to run extra charges through your debit card. If you don’t discover and protest the charges fast enough (my bank allowed only two days), you lose the stolen money. Fortunately, my lesson only cost $30. Now I have a business credit card instead of a debit card, which offers much better protection and a longer period to protest.
Diverting business revenue. Nobody ever thinks about the possibility of someone stealing checks made out to their business. Yet, it can be done, and it’s not too hard. The thief just sets up another bank account in the name of the company they work for at a new bank down the street. Then they grab legitimate revenue checks out of the mail and deposit them at the new account no one else knows about. Sometime weeks or months down the road, they can distribute money to themselves, as the only signer on the account. So, make sure the revenue you expect to receive actually makes it to your bank account.
Misdirected checks. If you have an outsourced bookkeeper writing your checks, believe it or not, some have been known to pilfer their client's money. One way to do that is to write checks to themselves and then enter the checks in the books as though they were written to someone else, such as a power company. One small business owner told me that his bookkeeper was using his checks to buy personal items at Sam's. I once discovered an in-house accountant paying all of her personal water, sewer, gas and power bills with company checks. We also came across a situation where a small-town clerk was giving himself an extra $9,000 check each month and cashing it at a bank in the next town. Bottom line, examine your check images from the bank each month and the receipts that back them up to make doubly sure that your checks are going to the right places.
Returning parts or supplies for cash refunds. Again, this is something employees can do pretty easily. They can buy unneeded equipment or supplies and just return the extra items for cash or credit a couple of weeks later. So, make sure you receive and retain all the small equipment and supplies you paid for.
Getting charged for the same thing multiple times. For example, in the past, my firm was charged twice for a shipment of toner cartridges. If we hadn't noticed it, we would have paid double. I've seen this happen many times to my clients for repair bills, insurance premiums and other items - mostly by “mistake.” You know you ordered the item, so you errantly pay the bill twice if it was presented to you twice. One time a local school district in the St. Louis area errantly paid an architect over $1 million twice, and he kept the money permanently. Whether you are guarding against error or fraud, be on the lookout for two or more identical bills for the same item.
Completely fake invoices. Some years ago, I received a $120 invoice in the mail for four cases of duct tape. For half a minute, it seemed legitimate. Then I decided that there was no way I ordered that much duct tape. In fact, I had not ordered any duct tape at all. The culprit was just sending out fake invoices to random companies, hoping that they would pay without any questions. I'm sure many did. So, take a little time to review your incoming invoices, and do not assume they are all legitimate.
Finally, I always keep in mind a phrase that Ronald Reagan made famous: Trust but verify. If one of your trusted vendors asks why you are re-counting those boxes of supplies, just tell the vendor that you know humans make mistakes, and therefore you don't trust anyone fully, not even yourself.
My list above is certainly not comprehensive, but I hope it has given you several things to think about and watch out for while managing your small business and safeguarding your assets.