Small businesses (fewer than 100 employees) fall victim to fraud more often than any other size business in America. What’s worse is that the median amount of loss is roughly $150,000. Though large businesses could absorb this amount with reasonable security, it could spell disaster for a small business on a tight budget.
These statistics, reported by the Association of Certified Fraud Experts, remind us that fraud is a real and present threat — especially to affordable housing properties or not-for-profit organizations — that may lack the strict policies and robust internal control structures that help protect larger ones.
Though the word “fraud” may conjure up mental images of a skilled hacker decrypting massive amounts of data to steal credit card numbers, it is more likely a low-tech threat to small businesses. Carnegie Mellon reports that 80 percent of insider small business fraud is non-technical; that means perpetrators simply create fake accounts, falsify financial statements, or abuse credit cards.
Credit Card Abuse Cases
In our experience as auditors, many questionable accounting practices stem from misusing credit cards for personal transactions or from failing to properly record and approve payments.
Employees who are aware of their employer’s lack of internal financial controls may be tempted to spend money on company cards and claim the transactions were for legitimate business purposes. We’ve seen a few creative ways people commit fraud with company credit cards, including:
- Paying for personal items like clothing or accessories
- Making purchases during vacations and paid time off
- Hiring a divorce attorney and covering associated legal fees
- Renting an apartment for a family member
Many fraudsters aren’t born with a head for criminal activity; they simply see an opportunity, justify their need, and exploit it.
Behavior like this is simple to discourage but requires effort and intentionality on a small business owner’s part.
Tips for Discouraging Credit Card Abuse
These best practices for putting a stop to low-tech fraud aren’t guarantees, but they are common ways of enhancing businesses’ internal controls.
- Put credit limits on company credit cards. If relevant to the company, set individual credit limits to the employee’s regular paycheck amount. That way, employers know they can recover the cost of attempted abuse from the employee’s next paycheck.
- Mandate receipts from credit card purchases are turned in weekly. Employees’ purchases should be approved by supervisors and matched against the credit card bill. The IRS requires employers to report who was present at this meeting, the purpose of the meeting, and the employee’s signature.
- Limit credit card use in general. Think critically about your organization’s mission: is it advanced by using credit cards, or is it hindered? Some small businesses may opt for reimbursement policies if it better matches their mission of fiscal responsibility. This practice can also help small businesses track expenses and monitor future cash flow needs.
- Reconcile credit cards to accounting software. Whether you use Quickbooks or another service, these tools can help employers capture all expenses and match them against the budget. When not captured or not often reconciled, credit card abuse shows up in cash flow errors and over-budgeting concerns.
Giving employees access to company credit cards is an exercise in trust and personal responsibility. Discovering fraud will test leaders’ abilities to confront others and investigate questionable behavior. While leaders want to trust their own team members, they also have to be responsible to the financial health of the organization.
And these explicitly fraudulent purchases aren’t the only type of credit card abuse. For example, we’ve also seen people use a company’s credit card rewards program to make personal purchases, when in reality, the company owns the points.
To help hold people accountable, make sure your organization has strong internal controls like the ones listed above — remember, small businesses with few employees are more susceptible and hard-hit by credit card abuse than large companies.
If you have specific questions about how to use credit cards safely within your organization, don’t hesitate to contact us. We’re here to serve you!