Hey folks! Today’s topic: how to prevent fraud!
If you own a business and someone hasn't stolen from you…
Either you haven't owned it very long, or you haven't found the fraud yet.
It's a constant battle. But there are ways to reduce it by being smart, so I’m going to share some of the hard lessons I’ve learned over the years.
I’ve divided these into three main sections: hiring, banking, and vendors (plus a few bonus ones at the bottom).
Let’s dive in!
Fraud Prevention: Hiring / Staff
1) Have a no-excuses nepotism policy.
Do not hire immediate family members. Exclude them from being service providers. No exceptions.
2) Watch closely for weird behavior.
Red flags might be things like regular gambling trips, fancy purchases, or insisting on owning a vendor relationship.
I also watch closely when employees refuse promotions. At one of my companies, a person refused a promotion (with a raise!) and asked to stay in their current job. Turned out she was running fraud that would have been discovered sooner if she'd taken that new job.
3) Use criminal background checks and credit reports prior to every hire.
This one’s pretty self-explanatory. Don’t get caught by surprise.
4) Insist on two-week consecutive vacations for certain positions
This ensures no critical process is completely owned by one person. It forces transparency.
5) When you catch someone, don't let it slide.
If you’re running a loose ship, people notice. And as soon as someone gets away with it, more people will start thinking about it.
So what do you do?
The cops aren’t going to do anything unless you're famous. But you can sue in civil court. Send a message.
Theft is inevitable and going to happen. All you can hope for is the bad people look at you as a less desirable victim and pick on someone else.
The way to do that is to run a tight ship!
Fraud Prevention: Banking
1) Minimize the number of people who can authorize payments and/or sign checks.
You want to keep cash payments as close to zero as you can. Also: don't use a signature stamp or automated approval. The fewer points of failure in your system, the easier things will be to track — and that in itself is a deterrent.
2) If you're the owner, look at bank statements yourself.
Don't let another employee get them for you. It’s your responsibility, and let people know you do it. People will be less likely to think they can sneak something through.
3) Separate reconciliation and approval roles.
Make sure whoever reconciles your cash / bank balances can never authorize payments.
4) Have a trusted person examine every single transaction on a regular basis.
This means going to the bank statements and looking at them vis-a-vis your accounts payable system(s).
5) Sweep cash balances into central control accounts daily.
You want the fewest number of accounts overall, with the fewest number of signers.
Fraud Prevention: Vendors
1) Insist on a 3-bid minimum policy.
Occasionally, get the 4th bid on your own. Or run the 3 bids past an expert to "smell test" them in case they're inflated… which suggests a kickback might be happening.
2) Make the CEO / owner / trusted person approve all new vendors.
This works on the same principle as minimizing the people who can authorize money movements. Reduce the number of people who can approve to a bare minimum.
3) Have vendors acknowledge your policies around kickbacks and self-dealing by employees — in writing.
Make sure they know you can and will sue them when you catch them. They shouldn’t feel like they’re off the hook just because they’re on the outside.
4) Spot-check vendors and partners.
Call them and confirm payment amounts and that they're actually real. If you’ve already implemented a 3-bid minimum, and approved them yourself, you can probably feel more confident here.
5) Meet with big subcontractors and contractors in person regularly.
The personal touch can go a long way — an in-person get together both cements the relationship and lets you probe into any problem areas more subtly. In-person is best because it's easier to get nonverbal information here.
Use lots of open ended questions. Ask about timelines, structures, and the bidding process. If you can, go for a long catchup — interrogations are long, because people can’t hold their lies together for 90 minutes or more.
6) Circulate the vendor list.
Show the list of vendors around to your team periodically (and at irregular intervals). Encourage people to flag anything suspicious.
3 other tips…
1) Have a multi-step approval process for all expenses, and require documentation.
If your staff know that the line manager, CFO, and CEO are looking at their expense requests, they’re a lot less likely to fudge things. Depending on the nature of your business, you might use this process for everything above a certain threshold, to reduce the admin burden.
As for documentation — everything needs paperwork. No exceptions.
2) When you can, have a reputable firm run a full audit.
What’s more, change auditors every few years. Have a trusted person or owner interview the auditor each year and identify any gaps where theft could occur.
For small businesses, there are tons of options for getting full audits, so you can change firms entirely. There are fewer auditing firms that can handle large businesses, so you may have to just change teams within the firm.
3) Just check things out.
Theft can happen all the time. You can often find it by just getting out from your desk. So Go for a drive around your sites. Take a walk through the offices.
We once caught a guy buying metal and selling it because we saw our truck parked at the recycler!
Have a great week!
Michael
