Prevent Fraud – Trust is not an Internal Control!


What are you doing to prevent fraud in your business? We see it in the newspapers every few months; a great local business gets taken advantage of by an employee, contractor, friend, or even a family member. Those are only the ones who report what happened. There are many more that don’t report it or do not even notice when it happens. Internal fraud happens to small businesses every day, but it does not have to happen to yours. With a small business, fraud can also lead to Trust Fraud. Trust Fraud also needs to be protected against, if you would like some advice on how to protect your living trust there are law firms out there that can help.

Keep reading to learn about some common types of internal fraud, and some easy measures that can be taken to ensure that there is simply no opportunity for theft in your business.

What is fraud?Fraud

What do you call it when something takes something from you without asking? That’s stealing! Why would anyone do that? You might be amazed what actions can be justified depending on the circumstances. Big problems often start small, so where do you draw the line?

“My boss is really giving and easy going. She won’t mind if I take home a pad of Post-Its. I know she would let me if I asked.” Did the employee ask? No. So is that stealing? YES!

The difference between that small example and a BIG problem comes down to three things: Opportunity, Rationalization, and Motivation. We call this the Fraud Triangle. It is your job as a business owner to eliminate the opportunity. Keep reading to find out how.

Setting the right corporate culture

Many people drive around 5 miles over the speed limit on a regular basis, but do you know people who drive 40 miles over? Why not? Any amount over is still illegal, right? The reason is because 5 miles over has become socially acceptable.

By creating a permissive environment where everyone knows they can get away with something, an alarming number of people will take advantage. That permissive environment creates Opportunity. The Rationalization may be that “it’s no big deal” or “it’s not going to hurt anyone.” The Motivation could be anything from “I’m late!” to “It’s fun!”

The point is, in order to prevent theft of any kind in your business, there needs to be a Zero Tolerance Policy to any form of theft or fraud. Make sure this is clear in your employee manual.

Who could do such a thing?fraud

“We trusted them implicitly. They were like family.” Unfortunately, the people we trust the most are the ones most likely to commit fraud because they are the ones that have the opportunity. We tend to assume that the people around us think and feel like we do. “We feel so betrayed.” Even when you know someone, keep in mind that people change. You can trust, but you also need to verify that your trust is well placed on a regular basis.

Keep an eye out for employees that are living beyond their means, having financial difficulties, exhibiting control issues, acting unusually close with customers or vendors, displaying a wheeler-dealer attitude, going through a divorce or family problems, acting irritable/suspicious/defensive, displaying addiction problems, or refusing to take vacation. These are all signs that there may be something going on under the surface.

If you suspect one of your employees might be committing fraud, legal representation is a must. A friend has recommended Adras and Altig attorneys at law ( to me. They were brilliant at building a case against the fraudulent party, according to my friend.

Common Types of Internal Fraud

  • Over a third of internal fraud cases are due to corruption, where the fraudster uses their influence in business transactions to violate their duty to the business for personal gain. This can include things like conflicts of interest, such as a non-profit board member using charitable funds to purchase goods or services from his personal business. It would also include bribery, illegal gratuities, and extortion.
  • Almost a quarter of internal fraud cases are due to billing schemes. This generally involves false invoicing either through a fictitious company or using the name of a legitimate vendor. The fraudster enters bills and bill payments into the books, but the physical checks are either being written to the employee or a company they own.
  • Almost a fifth of internal fraud cases are non-cash thefts. This can include stealing inventory or other tangible assets for personal use or to sell or profit. Sometimes fraudsters even have products shipped directly to a home address! Unexplained entries, altered records, fictitious sales, and write offs are good clues that there may be a problem with company property walking off.
  • Other common internal fraud types include: skimming, expense reimbursement, payroll fraud, check tampering, cash on hand manipulation, cash larceny, financial statement fraud, and register theft. Why not check out this Redirect to the final step website, they provide blog posts all about cybersecurity, which may help you deal with some frauds in an IT-based business.

fraudPreventing Internal Fraud

What do all types of internal fraud have in common? They are almost all 100% preventable.

Proper internal controls and separation of duties will eliminate the Opportunity for fraud in your business. How do you know if you can trust someone? Make sure everyone knows that there is no chance to take advantage, and don’t give them a reason to want to.

Fraud Prevention Tips

Want to keep internal fraud from happening in your business? Give some of these a try!

  • Have a good anti-fraud policy in your employee manual, and an anonymous tip system. Over 40% of fraud cases are discovered because of tips from co-workers. Train your employees and managers to keep an eye out for issues, and set up a culture of Zero Tolerance.
  • Use proper internal controls with oversight and separation of duties. For example, if you must have an employee sign checks, make sure there is another person who is responsible for reconciling the bank account. Verify that all checks are legitimate and made out to the correct parties. The app is a fantastic resource for this!
  • Make sure that mail is being opened, reviewed, and documented either by the business owner or by an employee that cannot benefit from its contents. Have clear systems in place for what departments handle which issues.
  • Do regular management reviews. Never trust anyone so much that they are beyond supervision. Cross train roles to occasionally change things up so that there is more opportunity to notice when there may be an issue. Make sure no one becomes “irreplaceable.”
  • Conduct occasional internal audits. Make sure that the highest people in the company always have access to the bookkeeping software. You should not need to gain access through an employee or contractor. Hire an outside accountant or fraud examiner to do periodic reviews.
  • Educate yourself. The information in this article is just the tip of the iceberg. There are lots of free resources available. Many organizations are happy to help you find the tools that are the most pertinent to your business and situation.

Where do I get more information?

  • Google it. There is tons of great information at our fingertips.
  • Check out the more educational resources at
  • Ask for help. Your accountant, bookkeeper, business coach, attorney, or financial planner should all be thrilled to point you in the right direction. If they are not thrilled, make sure you look into what they might be up to.

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