The Three Most Dangerous Types of Internal Fraud in Small Businesses and How to Detect Them Early
The Three Most Dangerous Types of Internal Fraud in Small Businesses and How to Detect Them Early
Trust within the team is an essential element for any establishment's success, but relying on trust alone to protect assets and resources is not enough. Internal fraud, even if it starts with small amounts, can lead to significant financial losses and poses an existential threat to small and medium-sized businesses.
The good news is that most of these practices can be prevented or detected in early stages through simple but effective control procedures.
In this article, we review the most common types of internal fraud, along with practical strategies for detecting them and enhancing financial governance in your company.
1. Vendor Invoice Fraud
How it happens:
An employee might create a fictitious entity and send invoices for services not rendered, or collude with a legitimate vendor to inflate prices in exchange for personal incentives.
Methods of Detection and Prevention:
Segregation of Duties: The person authorized to approve a purchase order must be different from the person responsible for approving payment.
Random Periodic Review: Direct communication with vendors and examination of invoice contents to ensure the validity of the services or products listed.
2. Expense Reimbursement Fraud
How it happens:
Unreal invoices are submitted, expense values are inflated, or the same invoice is submitted more than once.
Methods of Detection and Prevention:
Clear Written Policies: Precise definition of acceptable expenses and reinforcement of the requirement to attach original receipts.
Review by Direct Manager: Expenses must be approved by someone familiar with the details of the tasks and travel.
3. Asset Misappropriation
How it happens:
This type of fraud involves the theft of assets, whether simple office supplies, large inventory, or cash.
Methods of Detection and Prevention:
Surprise Physical Inventory: Conducting an unannounced on-site inventory and comparing the results with accounting records.
Access Controls: Defining authorizations for individuals allowed to enter warehouses or handle cash.
Governance Starts with Prevention
Establishing control systems does not imply doubting the team's integrity; rather, it reflects a commitment to professionalism and the protection of the business and shareholders. Good internal control creates a fair environment for all employees and prevents manipulation before damage occurs.
Prevention is not only less costly than a cure, but it is a strategic necessity for any company seeking to grow with confidence and sustainability.
Do you need to review your control systems?
We provide audit and control analysis services that help you detect weaknesses early and offer practical recommendations to enhance trust and transparency in your financial management.
Learn how our team can be the "second pair of eyes" that protects your company from within.
