Protecting Your Business from Hidden Risks
When most people think of fraud, they often think, “how was this able to go on for so long undetected?” However, contrary to common belief, fraud does not always occur dramatically. It’s often disguised as routine transactions or familiar relationships. Regardless of the size of the business, fraud is always a risk that cannot be brushed aside.
When an organization adopts an “it would never happen to us” mindset, it leaves the business exposed and vulnerable. Recognizing the potential for fraud and maintaining consistent vigilance is critical to safeguarding assets, preserving trust and ensuring long-term stability.
The following lists practical fraud prevention and detection tips that every business should implement to ensure continued success and stability.
Know Your Employees
Employees are a business’s greatest asset, but they can also pose a significant threat. Conducting background checks, reference calls and periodic reviews helps ensure the right people fill the right roles within the organization. It is essential to encourage an environment of transparency and accountability where employees feel safe reporting suspicious activities and behaviors. Even small red flags, such as unexplained lifestyle changes or resistance to sharing job responsibilities, deserve attention.
Tone at the top matters. Leadership sets the example. When management demonstrates integrity by following policies and addressing violations appropriately and promptly, it sends a clear message to all employees that fraud is not tolerated. Regular ethics and policy training helps to reiterate the message, reinforce expectations and teach employees how to recognize and report fraudulent activity.
It’s important to remember that fraud is an act of intentional deceit. Maintaining an attitude of vigilance is necessary to deter fraud and detect when it may be occurring.
Segregation of Duties
Segregation of duties is a foundational principle of internal controls and one of the simplest yet most effective ways to deter and detect fraud. No single employee should control all aspects of a transaction. Best practice is to divide responsibilities for authorization, custody and recordkeeping. This ensures that no one individual has total control over any transaction from start to finish, making it considerably more difficult to conceal fraudulent behavior.
For example, the employee who approves vendor payments should not also reconcile bank accounts. Without separation, an individual could potentially approve false payments to their own checking account without considerable fear of consequence.
Review Financial Reports Regularly
Regular reviews of financial records by management or ownership, especially bank statements, credit card charges and petty cash, can uncover suspicious activity early. Characteristics of suspicious transactions include round dollar amounts, duplicate vendors or unusual journal entries. During the review process, it is important to remember that even small discrepancies can reveal serious issues when investigated promptly. The earlier the discrepancy is investigated the more damage can be reduced.
Reconciling bank and credit card accounts daily or weekly, instead of monthly, increases the chance to catch unusual transactions or off balances, reducing potential damage. Use separate accounts to limit exposure to fraudulent acts. For example, maintaining a separate payroll account from the operations account reduces interaction, resulting in clearer statements and making suspicious activity easier to identify.
Leverage Technology
Modern accounting systems provide powerful tools to detect anomalies. Features like automated alerts, audit trails and analytics can flag unusual transactions, withdrawals or login attempts before significant harm occurs. Systems are exceptional at flagging irregularities, such as duplicate payments, sudden spending spikes or unusual transactions that are out of pattern from the norm.
Use strong, unique passwords and multi-factor authentication for sensitive accounts. This practice minimizes unauthorized access to software, accounts, privileges and financial and confidential information. Keep software updated. Updates often correct holes in a software’s security protocols and ensures that software is as secure as possible.
Partner with Trusted Advisors
External accountants and auditors can play a key role in helping an organization notice things that it otherwise wouldn’t. They offer expert assistance by providing independent, unbiased oversight to identify weaknesses in internal controls. Regularly discussing fraud risks with a CPA or advisor can significantly reduce the likelihood of control weaknesses or undetected fraud by strengthening defenses and encouraging proactive action — rather than reacting after damage has occurred.
As your organization grows, fraud risks evolve. Frequently reviewing policies, updating controls and consulting with trusted advisors ensures your business stays ahead of potential threats. Be prepared to adapt and update current policies to address growth or organizational changes.
Final Thoughts
Fraud can come from both internal and external sources, and it rarely announces itself. By implementing these everyday fraud prevention strategies — vigilance, proper training, segregation of duties, technological safeguards and collaboration with trusted advisors — your business can significantly improve its ability to detect, deter and respond to fraudulent activity, protecting both assets and reputation.
Contributing author: Kaitlyn H. Axenfeld, CPA/CFF, CFE, has extensive experience providing audit, review, compilation and advisory services to a wide variety of clients with a focus on the construction, architecture/engineering and manufacturing industries. Kaitlyn also specializes in forensic accounting and consulting services, including litigation support to law firms and privately held companies in fraud detection, damage calculations and prevention matters. If you have any questions or need any assistance, please contact Kaitlyn at kaxenfeld@dmcpas.com.