Fraud In Small Business - Part 2

December 23, 2014

Fraud in a small business can occur in many different forms. Obviously, the most common is the actual stealing of cash, supplies, inventory, or other assets. The more ingenious thieves can divert checks from receivables or payables. Without strong controls and security measures, these assets are easy targets for the fraud-minded.

There are other types of fraud that are still prevalent in small businesses but not as common.

  • Misrepresentation – Example: Misrepresenting some type of material fact, so an employee can get a bonus or take credit for something someone else did hoping for a promotion.
  • Concealing a Material Fact – Example: Hide an error, conceal information about a potential lawsuit from a lender, or sell known defective products.
  • Conflicts of Interest – Example: When all parties to a transaction are not aware of certain relationships that exist creating a conflict of interest when one party may gain at the expense of another.
  • Forgery – Example: Falsifying a signature as the payor on a check, endorsement, or contract altering someone's identity.
  • Bribe – Example: Inducing someone with financial gain to secure a bigger contract, better treatment, or other type of biased result that would not occur were it not for the bribe itself.
  • Trade Secrets – Example: Customer lists, intellectual property rights, or other proprietary trade secrets.

Fraud Prevention

Know the signs of possible fraud and remain alert to employee's habits and lifestyles. As a owner,

  • Conduct periodic fraud assessments of your business.
  • Advise employees of expected procedures and company controls.
  • Have continuous ethics training.
  • Establish open-door communication channels and policies.
  • Perform background checks on new employees.
  • Conduct exit interviews when employees leave (you might be surprised what you can learn!).


Remember, there are no assurances that any measures will completely eliminate fraud from occurring, but prevention is a key component in stopping fraud before it starts. Develop a fraud deterrence plan that includes:

  • Ongoing identification of potential areas of fraud.
  • Policies that do not tolerate illegal or unethical behavior from any employee.
  • Continuous employee training and reinforcement of procedures and expected conduct.


Posted by Richard Weinberger, PhD, CPA
Chief Executive Officer
Association of Accredited Small Business Consultants


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