Why Small Businesses Are Easy Targets for Fraud—and What Owners Can Do About It
When people hear the word fraud, they often picture a major corporation losing millions of dollars or a sophisticated cybercriminal sitting behind several computer screens.
That's certainly one type of fraud. But after working with small businesses for more than two decades, I've learned that fraud can be much less dramatic—and sometimes much harder to notice.
It might be an employee taking cash before a sale is recorded. It could be a questionable vendor payment that nobody reviews. Sometimes, it's an email that looks completely legitimate, telling an employee that a vendor has changed its banking information.
By the time someone realizes what happened, the money may already be gone.
For a large corporation, a $20,000 loss might be an inconvenience. For a small business, $20,000 can mean missed payroll, unpaid vendors, cash-flow problems, or money the owner has to replace personally.
That's why I believe small-business owners need to think about fraud before it happens, not after.
Trust Is Important. So Are Controls.
One thing I've noticed about small businesses is that they often operate on trust.
That's understandable. When you only have a handful of employees, people tend to wear several hats. The employee answering the telephone in the morning might be helping with invoices in the afternoon and preparing a bank deposit before going home.
There's nothing inherently wrong with that.
The problem begins when one person has control over too many parts of the financial process.
Suppose the same employee receives customer payments, records those payments in the accounting system, prepares the bank deposit, and later reconciles the bank account.
Who is checking that person's work?
That's the question I want a business owner to ask.
It doesn't mean you suspect your employee of stealing. Internal controls aren't about treating employees like criminals. They're about creating a system where mistakes and questionable transactions have a better chance of being noticed.
Good controls actually protect honest employees, too.
Fraud Doesn't Always Start With a Master Plan
People sometimes imagine that someone committing fraud wakes up one morning and decides to steal $50,000 from their employer.
It doesn't always happen that way.
It can begin with a much smaller amount.
Someone may be having financial problems and discover a weakness in the company's procedures. They take $100 and tell themselves they'll replace it on payday.
Nobody notices.
The next time, it might be $200 or $500. Eventually, what started as a supposedly temporary decision becomes something much larger.
Fraud professionals often discuss this using the Fraud Triangle: pressure, opportunity, and rationalization.
Of those three, opportunity is the area where a business owner can make a real difference.
You may not know what financial pressures someone is dealing with outside of work, and you can't control how another person justifies their actions. But you can make it harder for someone to take company money without being detected.
Don't Ignore the Bank Reconciliation
I'll admit that bank reconciliations aren't the most exciting part of running a business.
But they're important.
A good monthly reconciliation can uncover missing deposits, duplicate payments, unusual withdrawals, unauthorized electronic transactions, and simple bookkeeping errors.
The owner doesn't necessarily have to prepare the reconciliation. In many businesses, that wouldn't make sense.
But somebody independent of the person handling the money should be reviewing the activity.
And business owners should occasionally look at the bank statements themselves.
I encourage owners to pay attention to transactions that don't fit the normal pattern of the business.
If you normally pay a vendor $2,000 a month and suddenly see a $7,500 payment, ask about it.
There may be a perfectly reasonable explanation.
But ask.
A Simple Phone Call Could Save Thousands
Vendor payment fraud is another area where businesses need to be careful.
Imagine that you've been doing business with the same vendor for five years.
One afternoon, an employee receives an email that appears to come from that vendor. The message explains that they've changed banks and provides new ACH instructions for future payments.
Your employee updates the information and sends the next payment.
A few weeks later, the vendor calls asking why they haven't been paid.
That's when you discover the email wasn't really from them.
This type of fraud is especially dangerous because the employee may have followed what appeared to be legitimate instructions.
One simple procedure can make a big difference: independently verify changes to payment information.
Call the vendor using the telephone number you already have on file. Don't automatically use the telephone number included in the email requesting the change.
That two-minute phone call could prevent a five-figure loss.
Accounting and Cybersecurity Now Cross Paths
Years ago, businesses could think of accounting fraud and cybersecurity as two separate problems.
I don't think that's realistic anymore.
A criminal doesn't necessarily have to break into your accounting software to steal from your company. If they compromise an employee's email account, they may be able to convince someone inside the business to send the money voluntarily.
Phishing, fake invoices, stolen passwords, compromised email accounts, and social engineering have changed the way businesses need to think about fraud.
Artificial intelligence is making some of those scams even more convincing.
That's why basic cybersecurity practices are now part of good financial controls.
Use multi-factor authentication. Limit who can initiate and approve bank transactions. Train employees to question unusual requests. Consider requiring a second approval for large payments.
Most importantly, create a workplace where an employee feels comfortable saying, "Something about this doesn't look right."
I'd rather have an employee delay a legitimate payment for 20 minutes while verifying it than send $25,000 to a criminal because they were afraid to ask questions.
Owners Still Need to Look at the Numbers
Hiring a bookkeeper or accountant doesn't mean the owner should stop paying attention to the finances.
Nobody knows the normal rhythm of a business better than the person running it.
You know which vendors you normally use. You know roughly what payroll should be. You know whether sales have been good or bad. You probably recognize when an expense simply doesn't make sense.
Use that knowledge.
Review your bank activity. Look at the profit-and-loss statement. Occasionally review payroll, credit-card charges, customer refunds, and vendor payments.
You don't need to become an accountant.
You just need to stay involved.
Three Questions Worth Asking
If you're concerned about fraud in your business, you don't have to start by purchasing expensive software or creating a 100-page fraud policy.
Start with three questions:
Who has access to the money?
Who records what happened to the money?
Who checks their work?
If the answer to all three questions is the same person, that's an area I'd examine more closely.
It doesn't prove fraud is occurring.
It simply tells you that your business may be relying too heavily on one person without an independent check.
Final Thoughts
I've worked with small businesses long enough to know that owners already have plenty to worry about. Fraud prevention can easily fall to the bottom of the list when you're trying to make payroll, take care of customers, pay taxes, and keep the doors open.
But it shouldn't be ignored.
You don't have to assume the worst about your employees, vendors, or customers. You do need reasonable safeguards around the money you've worked hard to earn.
Review what's happening. Separate financial responsibilities when you can. Verify unusual requests. Pay attention when something doesn't look right.
Fraud prevention doesn't have to be complicated.
Sometimes, it starts with simply asking one more question before approving the transaction.
