Early in my business banking career, I encountered a client who had me evaluate her financials because she had cash flow issues. This is a common enough business problem, and there are different ways to address it.
This client operated a successful, established business but constantly had overdrafts on her account. Again, this isn’t an unusual business scenario, so there were no red flags.
After evaluating her financials, it started to become clear to me that she was the victim of a skimming fraud. Skimming fraud is theft that occurs prior to the cash of a business entering their accounting system. Simply put, the business was taking in cash, and her accountant was recording that the amount taken in was lower — and pocketing the difference.
The reason her accountant was able to get away with this fraud was that she was a trusted family friend who had known the business owner for years. She did the accounting for all of her family’s businesses, and had done so for nearly a decade.
I had to have an incredibly uncomfortable conversation with my client, and explain to her that the amount of money her business was receiving wasn’t the same amount as was being deposited into her account, and how it happened.
Since then, I have become fascinated with business fraud schemes, am an associate member of the Association of Certified Fraud Examiners, and love being able to help business owners protect their hard-earned money.
Fraud against a business can take many forms, from a small bounced check to high-dollar embezzlement, and everything in between.
Every business owner can help protect themselves by bolstering their fraud defenses, and below are some steps that every business can take before consulting with their financial partners and security experts to assess their unique needs.
Protect against check fraud. Use check verification and staff training to spot fake or altered checks. For outgoing checks, use a secure mail drop so your outgoing checks can’t be stolen and altered.
Use digital transactions more frequently. Use digital transactions whenever possible for incoming and outgoing funds, as modern digital transactions are more secure than paper transactions, and provide a digital trail.
Train employees on how to spot fraud, scams and counterfeits. People are always your first line of defense against fraud. Teach your employees who receive shipments to be on alert for vendor fraud, and how to spot the signs of spoofed emails and counterfeit cash.
Screen employees, and monitor on an ongoing basis. An “inside job” can be detected or stopped before it begins by carefully screening workers and conducting periodic audits randomly (and on a regular basis). It is also important to ensure that you always have a second set of eyes on your accounts. When one person controls all the books, like in my client’s case, you’re incredibly susceptible to being a victim of fraud — even from someone you know and trust.
Fraud monitoring should never stop. Preventing fraud is an ongoing process, so ensure you have an easy-to-use accounting system, inventory control systems, and a check and order verification process in place.
It’s also important to remember that most people are good, honest people — but smart businesses need to protect themselves from those handful of people who might be in a position to try to cheat the system.
The people who commit fraud are often not bad people, but there are factors — referred to as the “fraud triangle” — that lead a person to believe committing fraud is their only option.
When an employee has a financial need — whether that be an ill family member, mounting debt, a gambling addiction or any other number of issues — and see an opportunity where they can exploit their role within the organization, they are often able to rationalize to themselves why committing fraud is the only viable solution available to them.
In the case of my client whose accountant was skimming from her business, her husband had been ill and his medical bills had been mounting. She viewed the fraud as a way to get back on track and relieve some of her stresses. However, the fraud continued far longer than her husband’s illness, and — as is often the case — she had simply gotten used to receiving that “extra” money.
You can’t always know what is going on in an employee’s personal life to able to identify those likely to commit fraud, but you can implement ongoing measures that will protect both you and your business.
Veronica Archer is a relationship manager with Alerus Financial. For more information, visit www.alerus.com.