Resolution Experts, PC

Fraud Prevention for Small to Medium Businesses

Fraud prevention programs can be expensive. Many small to medium businesses ("SMB's") cannot afford to implement some of the controls that are commonly found in larger companies. For example, it may be too costly for an SMB to hire sufficient staff that would achieve the needed separation of responsibilities that will prevent an employee from both perpetrating and covering up a fraud.

This article will present the elements of a fraud prevention program that we believe are both critical and cost effective. All SMB's can and should consider implementing these controls:

  • Attitude at the Top
  • Ethics Program and Awareness
  • Whistleblower Hot-Line ("WHL")
  • Monitoring and Benchmark Operations
  • Background Checks
  • Risk Awareness and Observation

Attitude at the Top:

Leadership sets the tone for the entire organization. Bad behavior exhibited by leadership will telegraph to the organization that bad behavior is okay. The opposite is also true. In our experience, good behavior by top management is not an infallible shield to avoid fraud or ethics problems. However, bad behavior by top management will likely be one of the primary reasons underlying bad behavior on the part of an employee.

Ethics Program and Awareness:

An ethics program at an SMB is based on a written code of conduct that is promulgated throughout the company and understood by its employees. This program should be:

  • Suitable for the size of the company
  • Facilitate timely discovery and disclosure of improper conduct
  • Ensure disciplinary actions are fair and carried out promptly

To encourage employees to understand that code of conduct, the SMB should provide educational tools to the employees and incorporate evaluation of an employee's understanding of the code of conduct in his/her performance evaluations.

Whistleblower Hot-Line:

Most frauds are discovered because of a whistleblower. The SMB should therefore facilitate and secure communication from employees who observe unethical behavior by other employees. A whistleblower hot-line ("WHL") can help accomplish this goal. The SMB can set-up its own in-house WHL or contract with an independent provider at a relatively low cost. Use of a third party provider will enhance the WHL's image of confidentiality and security. The following elements of a WHL process should be established for it to be effective:

  • Confidentiality
  • Employee awareness
  • Screening of bogus submissions
  • Prompt investigation of credible submissions
  • Prompt and consistent response to discovered unethical behavior

Monitor and Benchmark Operations:

Operating data and other information must be collected, checked and benchmarked for purposes of identifying anomalies that indicate the likelihood of fraud. This can include surveillance, accounting, administration, and operating systems. Anomalies uncovered by this process can potentially identify areas where follow up investigation is required. Examples of the information and anomalies an SMB may consider include:

  • Daily reconciliation of cash register tapes with cash on hand
  • Trends in sales revenue
  • Trends in direct cost as a percent of sales
  • Labor productivity
  • GPS tracking of vehicles
  • Sales versus units of inventory items (e.g., pizza sales versus dough ball usage, or concrete sales versus trucks loaded)

These monitoring and benchmarking processes should be suitable to the size of the company and in all cases monitoring and benchmarking should:

  • Be designed specifically for the SMB's operations
  • Be performed by someone independent of the operating area involved
  • Include random checks or surprise audits
  • Be performed with the general knowledge of the employees

Background Checks:

Background checks are critical to ensuring a new employee is qualified both technically and ethically. If possible, a SMB should perform a background check on all new hires to ensure they are technically, attitudinally, and ethically qualified for the available position. Background checks can range from simply checking references, credentials, and credit history, to hiring a third party service to conduct a criminal background check. The nature and scope of the background check should be commensurate with the potential risk of fraud associated with the position the SMB is trying to fill.

Fraud Risk Awareness and Observation

When discussing the threat of terrorism, we frequently hear news commentators say, "If you see something, say something." This is true of fraud prevention as well. Unfortunately, the question is always, "What is it that I am supposed to see that merits saying anything?"

The success of "fraud risk awareness and observation" is driven by leadership behaviors (i.e., mentorship and attitude at the top) and by education. The SMB's code of conduct is the foundation of the employee's education and continuing education in ethics provides the cement that keeps this foundation in place throughout the years. There are hundreds of online continuing education courses on ethics that can be purchased for little cost. The SMB may also consider assigning an employee to join the Association of Fraud Examiners ("ACFE"), and require that employee to transfer the knowledge he/she gains from ACFE seminars and webinars to the SMB's other employees.


Fraud prevention does not have to be a costly investment for the SMB. There are many important tools in the fraud prevention tool box that require little cost to implement that can have a profound impact. These tools are:

  • Attitude at the Top
  • Ethics Program and Awareness
  • Whistleblower Hot-Line ("WHL")
  • Monitor and Benchmark Operations
  • Background Checks
  • Risk Awareness and Observation

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ResX Forensic Accounting services is founded on two principles:

  1. Uncover the answer
  2. Explain the answer

The key is to uncover the right answer and then to explain it to an audience that has no prior understanding of forensic accounting. Our clients benefit because we can get to the right answer quickly and efficiently, and because we can explain the answer clearly to the trier of fact.

Experience is what makes ResX Forensic Accounting unique.

Industries that we specialize in include: Manufacturing, Entertainment, Construction and Real Estate Development, Software Development, Healthcare.

Our areas of expertise include: Intellectual Property, Breach of Contract, Business Interruption, and Business Valuation.

ResX, provides independent forensic accounting services for complex litigation and contract compliance and fraud. ResX is based in Michigan and serves clients throughout the United States. For more information and to learn about working with ResX, please visit our website: or follow us on LinkedIn.

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