Five Business Fraud Red Flags to Watch For

Unfortunately, small businesses can be susceptible to fraud and that includes franchises. Fraudsters often present themselves as individuals who can help small businesses thrive by taking on lots of the workload and never leaving work, but the fact is that they might be trying to concentrate work -- especially finances -- through themselves so they alone have access to the books and bank accounts.

Not all employees who steal from employers are devious fraud operators looking for victims. Sometimes they start out as good employees who just happen to notice one day that they are the only ones who have access to the bank accounts and nobody checks their work. That kind of temptation can be too much for some people.

It goes without saying that fraud to a small business can be devastating. Because they are more susceptible to it, small businesses tend to get bilked out of an average of $200,000 per fraud incident compared to $100,000 for big companies, which tend to have more checks and balances in place.

Here are five red flags of fraud that you can watch out for in your franchise business and solutions you can put in place to make sure it doesn’t happen:

1. Concentration of Work

One of the dangers in a small business is that with a small number of people, important work can easily get concentrated on one person. It can be tempting for small business owners, especially those who don’t like or have much knowledge of accounting, to give their finance people control of the bank accounts just to make everything easier. But, that could lead to trouble.

What to do:

To stop concentration of work, you have to have checks and balances in place and for that, you need to refrain from giving one person too much control over any one area of the business, particularly when it comes to the money.

Beware of the person who volunteers to do everything. They might just be a diligent overachiever, but they also might be intentionally trying to concentrate work on themselves.

Hiring a third-party bookkeeping or accounting firm can be a cost effective solution to not having enough people in the office to handle the finances.

2. Displays of Wealth

Sometimes when someone is getting away with something, they can’t help but show it off. If an employee buys a car that looks a little too expensive for them to be driving or they wear clothes that don’t quite seem to fit with the wage they get, they might just have expensive tastes and are willing to live above their means to indulge them, or that could be a red flag.

What to do:

Basically, just keep your eyes open for anything that looks suspicious in employee behaviour, which includes their spending habits (although you obviously don’t want to get too nosey about that). It is sometimes the person you trust the most who is wronging you, so try to always look at your employees -- even the ones you’re close to -- with a bit of detachment.

Also, get covered for employee dishonesty (or get a rider to cover contractors) by your business insurance provider.

3. Lack of Qualifications

Sometimes fraudsters get audacious and they’ll present themselves as experts in an area, like finance, when they don’t actually have any qualifications. If they’ve managed to do it once and they didn’t get caught, that will embolden them to try it again. By the time they get to your business, they might be a seasoned liar.

What to do:

Two words: background checks.

4. Refusal of Vacation

An overly diligent employee who never takes a vacation to the point of refusing to leave for time off might just love their job so much that they are willing to sacrifice their deserved free time for it, but they also might be hiding something. If they never take time off, that means nobody has to cover their work, which means they are less likely to get caught.

What to do

Make vacation mandatory to the point where you actually force people to take it. It can be difficult in a small business to lose someone for a week or two, but it gives you an extra check in place on a person’s work and your employees will also return fresh.

5. Missing of Oversight

As mentioned previously, some business owners who don’t have a lot of grasp on finances will simply ask their finance person to handle everything and be done with it. Sometimes business owners can be so numbers-averse that they don’t even look at their bank statements.

What to do:

Always look at your bank statements. Get them sent to your home address or personal email if necessary, but make sure you give your bank statements a look over. In addition to that, get your books audited at least annually by a third party.

Fraud in a small business can easily put it under, so it’s important to be diligent about watching for the warning signs. Franchises will often help their franchisees with admin work and can help spot the warning signs of fraud in a small business. If you are ready to take the leap into franchising, sign up for a free FranNet franchise search and consultation today. We would be thrilled to help you.

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