Billing fraud is the most common type of fraud that small businesses experience, accounting for 27% of all fraudulent activity.
Billing fraud primarily occurs in one of three ways, when employees:
While employees may justify their illegal actions due to need or entitlement, billing fraud ends up costing small businesses billions of dollars every year.
Business owners must understand where their companies are vulnerable, how to uncover fraudulent activities, and what types of precautions to take to prevent the costly effects of billing fraud.
Whenever trust is present, that trust can be exploited for personal gain. Business owners at small, private companies are more likely to hire friends and family than their larger counterparts or publicly traded companies. Employing people who already have a close relationship with each other inherently creates a tight-knit culture. This type of environment breeds trust, which can create opportunities for fraudulent activities.
Small businesses also have fewer employees, which makes it difficult to segregate duties properly. In some small businesses, the same person is responsible for accounts payables, cash reconciliations, and maintaining financial reports. The result is a critical fraud vulnerability due to a lack of oversight. When there are not enough employees to divide duties effectively, some financial functions may need to be outsourced or externally audited to reduce vulnerability.
While large organizations typically have extensive accounting control systems, smaller companies tend to lack these types of procedures. Missing accounting controls make businesses more vulnerable to fraud. Access controls, required purchase authorizations, standardized templates, trial balances, reconciliations, and data backups all contribute to reducing fraud vulnerability.
The earlier fraud can be identified, the better. When employees are committing billing fraud, they can become more brazen over time, stealing larger quantities the longer fraudulent activities go unnoticed. As a result, the cost to the business can increase exponentially over time, reducing the chances that the business will be able to recoup lost profits once the scheme is detected.
Discover fraud as early as possible by:
The most effective way to uncover fraud is to hire a third-party forensic accountant or auditor to examine business financials. Auditing accounts payable, cash accounts, credit accounts, and payroll can identify simple errors and detect ongoing fraud schemes to keep employees honest.
Preventing Billing Fraud
The fraud triangle asserts that for fraud to occur, three elements must be present – opportunity, perceived pressure/motivation, and rationalization. An organization can only control the first of these three. Therefore, its best defense is removing any opportunity for fraud by mitigating business vulnerabilities.
Without acknowledging that anyone is capable of illegal activity, business owners cannot be vigilant enough to thoroughly protect the company. While some fraudsters steal for greed, many others do so because they are unexpectedly in a difficult financial situation. Some thieves may even justify their activities by reasoning that they will replace the money before the theft is discovered. While business owners certainly need to trust their employees to create a positive working environment, unabated trust is a dangerous scenario.
Billing Fraud Checklist
Hiring an accounting firm is a shrewd way to guarantee these billing best practices will be executed correctly. Leaning on a third-party provides the impartiality needed to discover past fraudulent activities and avoid future instances of fraud. Contact us today!
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