How to protect your small business against internal fraud Featured

9:01pm EDT July 31, 2011
How to protect your small business against internal fraud

Technology has opened up doors for a new class of high-tech criminal. Business owners and consumers are bombarded with articles and news reports warning against the dangers of identity theft, computer hacking and other scams that were unheard of 25 years ago.

While it’s important to keep your computer and financial records safe from unknown tech-scam professionals, the criminal your business could fall prey to may be much more familiar. Unfortunately, many of the most common types of fraud cases are internal.

Smart Business spoke to Glenn Lauter and Paul Orsborn of Comerica Bank about what you can do to protect your small business against internal fraud.

How common is internal fraud?

Lauter: Employee-committed acts are the most common and most expensive type of fraud, accounting for more than half of all reported cases. Employees have the easiest access and can sometimes harbor resentment or anger that pushes them to break the law. According to the Association of Certified Fraud Examiners, $652 billion per year is lost to internal fraud. Small businesses are the most vulnerable, accounting for a whopping 80 percent of all internal fraud cases.

What types of internal fraud should I be on the lookout for?

Orsborn: The most common ones are asset misappropriation, corruption and doctoring financial statements, as well as pilfering company cash or resources. Bribery and kickbacks, which involve vendors or others outside the business, are also common.

One thing that is helpful in alerting management to a possible internal theft is a company policy that requires employees to report suspicious activity of another employee. In order to be successful, there must be a secure, anonymous method for the employees to report any such activity.

What preventative measures can I take?

Lauter: Many businesses fall victim to fraud because they trust their employees and think that it can’t happen to them. One of the most effective measures a business owner can have in place to protect his or her business is a solid set of policies and procedures. Employees should be well versed in these policies and know that violations will not be tolerated.

How can I help ensure the people I hire are trustworthy?

Orsborn: Small businesses should take measures to screen potential employees before they entrust them with the company’s confidential information. Inform candidates they are subject to a background check for initial employment and a subsequent check if they move into a new function in a more sensitive area. Permission for credit checks should also be a condition of employment.

Additionally, separation of duties is an effective control a company can put in place to protect itself. For example, inventory warehouses can be full of loopholes that should be watched. It may be as simple as having a different person check out equipment than the one who checks it back in. Make sure that your employees know exactly what their responsibilities are and have been thoroughly trained.

What role can I play in preventing fraud?

Lauter: It is best to be involved in your business and oversee all areas of operation so if something doesn’t look right, it can be addressed right away. For instance, keep control of your bank account. Too often, small businesses tend to give other people control of their accounts and do not monitor the account activity until it is too late. Also, scrutinize checks for your signature and never sign a blank check. Avoid using a signature stamp, as that will limit the potential for someone to forge a company check. Finally, have an outsider review your books monthly, or at least quarterly, with no advanced warning to your employees.

GLENN LAUTER and PAUL ORSBORN are senior vice presidents for Comerica’s Texas Business Banking Division. Comerica Bank is the commercial banking subsidiary of Comerica Incorporated (NYSE: CMA), the largest banking company headquartered in Texas, and strategically aligned by three business segments: The Business Bank, The Retail Bank and Wealth & Institutional Management. Comerica focuses on relationships, and helping people and businesses be successful. In addition to Dallas, Houston and Austin, Texas, Comerica Bank locations can be found in Arizona, California, Florida and Michigan, with select businesses operating in several other states, as well as in Canada and Mexico. Comerica reported total assets of $55.0 billion at March 31, 2011. To receive e-mail alerts of breaking Comerica news, go to www.comerica.com/newsalerts.