How to identify and avoid small business fraud

By: Updated: November 16, 2022


Unfortunately, when you run a small business you are a target for fraudsters. Many of these scammers are located in other parts of Canada or even other countries. However, you also need to be on the alert for dishonest people within your organization.

In this article, we look at the several of the most common types of small business fraud. Of course, this list is not comprehensive and criminals are always cooking up new schemes. So, the best advice is to keep your guard up – if it smells funny it probably isn’t legitimate.


What is business fraud?

Small business fraud is any attempt to separate a business from its money in an unlawful way. According to a survey of small businesses by the Canadian Federation of Independent Business, one in five have been the victims of some kind of fraud.

According to the accounting firm BDO, small business fraud costs Canadian firms $30.4 million every year.

There is a tendency among business owners to turn a blind eye and think it can’t happen to them. But of course it can. That’s why it’s vital to be prepared.


What are the most common frauds in small business?

Let’s divide this into two categories, internal and external.


What are the internal fraud risks?

Unfortunately, your employees may be committing fraud. The most common frauds are:

  • Theft of inventory, computers and office supplies
  • Taking cash or paying fake invoices
  • Submission of bogus expense claims

The first step in preventing employee fraud comes in hiring. Check references carefully to make sure that there are no red flags. In the employee contract and employee handbook, set out the expectations around behaviour and state that fraud will not be tolerated. Indicate that it is grounds for termination and possibly criminal prosecution.

It’s important for the business owner and managers to set an example for the other staff. Be scrupulous about not taking office supplies and be sure to keep receipts for all travel and business expenses.


What are the external small business fraud risks?

There are many. You could be defrauded by both customers and suppliers. People pretending to be with the government can send you emails to falsely obtain your business information. Hackers can break into your computers for vital financial data or to hold your information as ransom.

Here are some of the key risks:

  • Credit cards: Criminals can steal credit cards and then use them to order goods online or by phone. You ship the materials to them and only realize later that it’s a small business fraud.
  • Fake invoices: Scammers will send you bogus invoices in an attempt to get you to make payment by cheque or e-transfer.
  • Dangerous emails: Hackers will send you an email with a link. If you click on it, it can result in malware getting into your computer. Or “ransomware” can seize your data and demand that you send payment before it will be released.
  • Office supply scams: Fraudsters will grossly inflate the prices on printer ink, paper and other supplies.


How can you prevent small business fraud?

This needs to be a team effort. Train employees to be on the alert for cash missing from the till or inventory that is disappearing.

Make sure that you have inventory control measures in place. Do frequent financial checks to make sure that all accounts payable are legitimate.

Educate yourself and team members about cybersecurity. Make sure that employees are not fooled by fake invoices and other scams. Train people not to click on links in emails. If a staff member does go to a link, ask them to alert you as soon as possible. It can be investigated and any damage can be mitigated if it is dealt with right away.


Are small businesses more vulnerable to fraud?

Yes and no. On the one hand, hopefully you know your customers and suppliers well. So, if you suddenly receive an invoice out of the blue, you can look into it further to see if it’s legitimate. Firms with a small number of employees normally are at less risk since everyone knows each other and are aware of what people are up to.

However, as a small business you may not have the sophisticated technology protection that big businesses have to stop hackers and ransomware criminals. If you are too small to have your own IT security specialists, you may wish to hire a company with expertise in this area. Be sure to look into this before you get hit – an ounce of prevention is worth a pound of cure.


What should you do if you are hit by small business fraud?

First of all, it’s important to contact the police. While you may not get your money back, law enforcement can investigate and warn other business owners in your area. You will be doing your civic duty and helping other companies.

Conduct your own investigation into how your company was defrauded. If necessary, you can bring in IT consultants and forensic auditors with special expertise. They can help you put measures in place to ensure that it doesn’t happen again.

Check your insurance. You may be covered for fraud-related losses. If not, you may wish to purchase this type of coverage for the future.


In summary: Small business fraud can hit any company

Small businesses in Canada can be especially vulnerable to fraudsters and cybercriminals. They may be considered easy marks because they lack the sophisticated IT defence systems available to large corporations. However, the good news is that it is possible to block the bad guys. And it doesn’t need to be expensive – a vital step is making sure that your employees are trained to watch out for scams and fraud.


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