Fraud Protection

It is hard enough to keep a business profitable when everything is going well, but add a fraud event to your business and things can get real tough.  Where can fraud come from?  The obvious risk factors are customers and employees. Customers will try to use stolen credit cards or write bad checks to you and if they have not yet, you are indeed fortunate.  This article is not meant to be exhaustive on this subject as there are many better sources available on the internet but here is a short list of things you may want to think about.

Customer Fraud:

1. When you take a credit card, check their drivers license as well and also make sure that the signature matches.  Sounds simple but the simple act of requiring a drivers license will deter many fraud attempts. 
2. Also on credit cards, use the automated verification procedures that your card processor uses.  If your systems go down once in awhile, make sure that your store personnel are trained on phoning in for a verification.
3. If you take checks, be careful. There are some great check verification systems that, for a fee, will take the burden of this transaction off your shoulders.   You may only want to use them on larger transaction due to the fees but it is easy to pay for if it prevents a bad check expense.
4. Many people will not take out of state checks or checks without a preprinted name and address.  And of course get a good ID (Drivers License is preferred) that matches the address on the check.
5. Always use common sense and train your personnel to deal with these situations professionally without offending the potential customer.  In particular the beauty of third party verification of credit cards and checks puts the “system” in the role of the bad guy rather than you.

Employee Fraud:

1. We all hope that every employee will be honest and ethical, but the fact is, there will be the occasional bad egg.  Invariably, the largest frauds are the ones that catch you the most by surprise though because you thought that particular employee was honest.  Always keep your eyes and ears open and look for things that might encourage stealing including short term financial strain, a substantial change of lifestyle or similar.  If you think there is an issue, look into it.
2. Who controls the money in your company?  You should always get all bank documents before your employees and look at them to make sure nothing is wrong.  Keep check signing privileges to only a few select employees or just yourself and if possible, have more than one person work on your bank/check reconciliations to minimize the chance of theft.
3. Do you know all your vendors?  Who has authority to authorize an expenditure?   There are companies that send out fake invoices for common products (lightbulbs for about $100 is a common one) and a poor accounting system will pay them without thinking twice.  Look at a system generated listing of all the checks issued each check run.  Do you recognize all the names on the list?  If not, ask for more information from your accounting department.
4. Credit card transactions can also be a source of fraud.  Do you ever process credits for returned merchandise?  Who approves the credits and then who ultimately executes the transactions and are you certain that they are not processing credits to a different card such as their own card with no inventory returns?  These are hard to trace and generally only become apparent when you do a physical inventory at a later date and can’t find the “returned” merchandise.
5. Cash is always an issue for retailers and it should be handled carefully.  Daily accounting and reconciliation of all transactions should be completed by a third party other than store personnel and excess cash deposits should be made daily both to keep excess cash on hand to a minimum and to maintain an accurate daily record of cash in and cash out.  If there is an attempt fraud, systematic auditing like the above will help you place when it happened and narrow down who might be involved.
6. Are you sure your inventory is well protected and is not walking out the door?  Employees can walk out the door with your money (inventory) or process fake transactions and allow friends to do the same. Among other measures, make sure you do regular physical inventories.

The above list is by no means exhaustive but this is an area where most businesses only worry about it after they have been caught unexpectedly and experienced a fraud event.  You may not stop every incident but you certainly can take measures to keep them small and spot them before they get out of hand.

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