Fraud is a growing problem for small businesses

Corruption, embezzlement, fraud, these are all characteristics which exist everywhere. It is regrettably the way human nature functions, whether we like it or not. What successful economies do is keep it to a minimum. No one has ever eliminated any of that stuff. ~ Alan Greenspan

According to the Small Business Administration small businesses lose on average $155,000 each year through fraud and this growing over time. Some estimates put fraud loss at 5 percent of sales. Fraud is more common in smaller businesses, as they do not have the resources to prevent it. Additionally, fraud is one of those issues that need continuing monitoring and just not a one-time fix.

Fraud is defined as the wrongful or criminal deception intended to result in financial or personal gain. It is important to note that more fraud comes from trusted employees than anywhere else.

A local firm had a bookkeeper that was almost considered part of the owner's family. He had been employed with the firm for over 10 years where he managed to steal more than $500,000 by writing checks or withdrawing funds electronically to himself every two weeks. He was able to get by with this, as he was the one that reconciled the bank statements. He was only caught as the owner needed to find a check and just happened to come across all of his checks and withdrawals.

The hardest thing in this case for the owner was the loss of trust. He felt betrayed and it took him a long time to get over this.

Here are some ways to prevent fraud. First, consider doing background checks -- criminal and financial -- on any potential new hire that will be handling money or can affect money. Several times I have seen employees that did purchasing for companies that were receiving large kickbacks from companies to get them to purchase large volume of goods.

Second way to prevent fraud is to have regular training for all staff on what to look for to prevent fraud and misuse of company information. Many accounting firms offer this service.

Third, make sure that the person who writes the checks and issues payment and the person that reconciles them are two different people and are not friends.

Forth, have a dedicated computer for all banking activities that is not used for any thing else. Computers that can visit various social media sights and web surfing make the firm's financial data vulnerable.

Fifth, develop an approval for large purchases that requires two managers.

Sixth, validate time sheets for correct hours, rate, and overtime. By far, this is the most common fraud that I have seen over the years.

If you do catch an employee stealing in any way then you need to turn them into the authorities to insure that no other firm has a similar type of experience. After all, if you do not report them then you are allowing them to continue this behavior.

For every dollar you can stop in fraud, this same dollar will hit the bottom line.

Jerry Osteryoung, a business consultant, is a Jim Moran professor of entrepreneurship (emeritus) and professor of finance (emeritus) at Florida State University. Reach him at jerry.osteryoung@gmail.com.

This story was originally published November 19, 2015 at 10:51 AM with the headline "Fraud is a growing problem for small businesses."