If you are a small business with fewer than 100 employees, you are the perfect target for fraud.

According to the most recent Report to the Nations on Occupational Fraud from the Association of Certified Fraud Examiners, the median loss to a small business (below100 employees) is $141,000; only companies with 10,000-plus employees experienced a higher median loss of $200,000. Because small businesses have fewer employees and lower revenues, the impact of a fraud loss hits them harder than larger companies. 

Here are five areas of your business where fraud often occurs:

Fuel Expense

This is one of the most common types of fraud that contractors face. You have employees using company vehicles for personal errands or side work. (This doesn’t just cost you money. It exposes you to significant potential liabilities with your insurance coverage.) 

You also have employees filling their personal vehicles as well as family and friends’ vehicles using company fuel credit cards. In a number of cases studied, technicians would call their spouse or family member and meet them at the gas station. They would back up their personal vehicle to the pump where the technician was fueling the company vehicle. They would fill their personal vehicle after filling up the company vehicle. They did this in one transaction, so it was harder to detect. The increased use of technology (GPS on vehicles) and monitoring of expenses via company Key Performance Indicators (KPIs) have brought many of these thefts to light in contractors’ businesses.

Cash

Cash is the asset most susceptible to theft. It is easily misappropriated, lost or stolen. It is essential to have effective internal controls over cash transactions (receipts … sales and disbursements … petty cash, and also credit card processing by employees).

Here are a few ways that employees steal cash from the company. A customer pays a technician in cash for a service call. The technician pockets the money and tells the office that they canceled the call when they got there, or they’ll cover their tracks by forging the service ticket and turning in only the amount of the service call fee and say the customer declined the work. 

I’ve also heard stories where the technician asks the customer to make the check payable to him or to cash. It may seem odd, but some manipulated customers do this. The technician cashes the check and alters the paperwork. A technician for a contractor in the Southwest went so far as to get his own credit card machine and set up a bank account with a name similar to the contractor he worked for. He processed client transactions through his own machine and then made the deposits into the bank account he had set up rather than the contractor’s bank account.

It’s not just technicians that can do this.  It happens with office personnel as well. They’ll steal cash payments and then cover it up in the company’s records. 

Some ways to reduce this happening include following up with your customers after service calls.  Also, have a second (separate) person count all cash receipts that come into the office. It’s also important to lock up all cash and checks received until they’re ready to be deposited in the bank. Again, if possible, after filling out the deposit slip, have separate people make the bank deposits.   

Check Washing

Per the U.S. Postal Inspection Service, check washing involves changing the payee name and often the dollar amount on checks and fraudulently depositing them. Scammers typically target businesses more often because the check amounts are much higher, and businesses usually have a predictable schedule for paying bills.

The best way to avoid check washing is to make payments to vendors and others via an electronic payment system (bank, credit card, etc.)

Take your outgoing mail to the post office or give it directly to the postal employee. Do NOT put any mail in the blue collection boxes because, in many cities around the U.S., postal employees have been robbed of their blue box keys and then mail stolen out of them.  

Never leave mail in your mailbox overnight. 

Put a hold on your mail at the post office if you’re going out of town for any reason (business conference, vacation).

Payroll

There are several ways you can become a fraud victim in the payroll department. They include:

•    Falsifying time cards or recording hours worked: This is harder to do with technology and software today.
•    Unearned bonuses, incentives or raises: This is an area where collusion between employees may occur.
•    Duplicating payroll checks (double-paying someone): This one should not be difficult to detect if you have someone reviewing payroll and reports on a regular basis. 

Inventory

An employee may take inventory items from the shop or a service truck and not report them. They may use the materials personally, on a side job or sell them to someone else. This becomes evident when the company does a physical inventory count. The counts will come up short … i.e. the inventory “shrinks.”

If you don’t conduct physical inventory, then the theft may go undetected for some time. Unless it’s a significant theft, it wouldn’t show up on a financial statement as much of a variance. For example, if someone steals $1,000 worth of materials during the year in a company that has $200,000 in material purchases and that is one-half of a percent of material purchases. 

A significant control that you can put into place in this area is physically securing your assets (access to materials and equipment). Lock up your inventory. Check your security cameras for unauthorized after-hours access to the shop (assuming you keep inventory there). You can also establish procedures for ordering materials (i.e. a purchase-order system).

I’ve also seen a trend in recent years where many contractors are intentionally reducing the amount of inventory items and quantities that they keep in stock. This also helps with the company’s cash flow as you don’t have excess cash tied up in inventory that doesn’t sell frequently.

The above five areas are some of the top ways that a company is susceptible to fraudulent activities. I believe contractors face exposure to potential fraud in almost all areas of their businesses. Implementing and monitoring internal controls is the best way to minimize the chances that you’ll be a victim of fraud. The cost to implement policies and procedures to reduce the risk of fraud is much less than the cost of recovering from a fraud loss.  

Michael A. Bohinc is a Cleveland-based accountant and owner of Keeping Score, Inc., a financial management and accounting firm. He is a Premier Business Coach for Service Nation.  He has more than 35 years’ experience as the Chief Financial Officer of his family’s plumbing business. Michael is a recipient of the Servant Leader Award. He is the youngest to ever receive this honor. Michael will be leading a workshop on preventing and detecting fraud on October 17, 2024, at the Service World Expo in Orlando, Florida. Contact him at (440) 708-2583 or mbohinc@keepingscorecpa.com.