Common tricks fraudsters use to scam your small business

One out of every five small businesses in Canada will be victimized by fraud this year, costing them on average a loss of $6,200, according to the Canadian Federation of Independent Businesses.

I have often heard their stories and seen what happened to them since many decide to outsource their accounting services after they have been impacted negatively by someone they thought they could trust.

In this first of a two-part series, I will explain the most common ways that small businesses are hit by fraud, and in the second column, the focus will be on how you can protect yourself.

Overall, the major mistake that most small business owners make is putting the total trust of their bookkeeping and accounting into the hands of one employee who the owner totally trusts. They trust that person so much that they ignore setting up internal controls.

When someone you trust starts taking your money, it can be months before you become aware of it.

As a rule of thumb, never set up a bookkeeping or accounting system where one single employee has control over all three essential financial functions like authorization of payments, record keeping and custody of assets.

The busy small business owner thinks that if they insist on approving and signing every cheque, they will be able to ensure the security of their system. But that is just not enough as I will illustrate by describing four common fraud schemes.

Cheque tampering is a major cause of fraud

In Canada, more than 11 percent of small business fraud comes down to cheque tampering. This means that a trusted employee steals from his or her employer’s funds by intercepting, forging or altering a cheque or electronic payment drawn on one of the organization’s bank accounts.

The fraudster often simply alters the cheque by changing the name of the payee. In other cases, they forge your signature on a cheque or use pre-signed cheques (you know, the batch you leave with your most trusted employee because you have to be gone for a couple of weeks) to send to payees different from what you intended.

Sometimes they will cleverly hide a fraudulent cheque in a batch of cheques you are signing, especially when they sense that you fly through the pile of paperwork without closely examining or questioning what the payment is for.

Skimming and other fraud tactics

Stealing from small businesses can also be done by skimming, which is when an incoming payment is stolen by the trusted employee from the business owner before it is recorded on the organization’s books or records.

There are a number of payroll schemes that can also be used to defraud small businesses. This is done primarily when the person handling payroll has the business owner issue a payment by making false claims for compensation.

Billing schemes are often used as well to defraud the unsuspecting small business owner.

The trusted employee has the owner pay what appears to be genuine invoices, but they are really for fictitious goods or services. Sometimes the invoices are inflated because they include personal purchases. This can be very difficult fraud to uncover since often the amounts are not large in each instance, but over time, they add up to many thousands of dollars.

Little Black Book of problems

In a major effort to make business owners more aware of fraud, the Competition Bureau of Canada last year created a new edition of the Little Black Book of Scams.

You can download it free in a number of languages as a PDF at https://www.competitionbureau.gc.ca/eic/site/cb-bc.nsf/eng/04333.html.

Remember at the end of the day in your small business that while you may be suspicious of strangers, the person who will most likely steal from you is someone you know and trust. For the protection of yourself and everyone involved, set up protocols to ensure that no one person handles all aspects of your money management.

Certified professional bookkeeper and certified tax specialist Elena Ivanova is managing director of Piligrim Accounting Inc., a national accounting and tax preparation service based in Richmond Hill, Ont. You can reach her at elena @ piligrim-accounting.com.

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