Safeguarding Your Small Business from Expense Fraud: A Practical Guide

As a small business owner, protecting your hard-earned revenue is crucial for sustaining growth, staying competitive, and ensuring long-term success. However, one particular threat that can jeopardize your bottom line is expense fraud. 

The Association of Certified Fraud Examiners (ACFE) defines expense fraud as “a scheme in which an employee claims reimbursement of fictitious or inflated business expenses.”

Fraudulent expense claims can add up to significant financial losses

According to the 2022 Report to the Nations study published by the Association of Certified Fraud Examiners (ACFE), it’s estimated that organizations lose around 5% of their revenue to fraud each year, averaging a loss per case at over $1,7M. These costs come from several factors, including direct reimbursements of fraudulent claims, administrative costs, and increased insurance premiums.

In this guide, we will explore the costs of expense fraud, the unique challenges small businesses (SMBs) face, and practical solutions to mitigate this risk.

The importance of protecting your bottom line from expense fraud

Expense fraud is expected to reach over $16 billion by 2027, making it one of the most expensive types of fraud worldwide. Although managing expenses and reimbursements is tedious—especially for small businesses with fewer resources—its impact can not be overlooked.

Over time, expense fraud can drain your company’s resources, undercut your revenue, and undermine trust within your organization. Whether it’s employees inflating expenses, submitting false or duplicate claims, or misusing corporate cards, expense fraud can lead to financial losses and reputational damage.

6 Reasons why SMBs suffer higher fraud losses than larger companies

Why is it that smaller businesses suffer higher losses from expense fraud than larger organizations? According to the ACFE, small businesses face several unique challenges when it comes to managing expenses and preventing fraud, including:

1. Limited resources and expertise: Many small businesses may rely on manual expense reporting rather than advanced fraud detection tools, leaving them vulnerable to human error and fraud. They may also lack dedicated personnel with expertise in fraud prevention, detection, and investigation.
   
2. Less stringent internal controls: Small businesses may have less formalized policies, procedures, and internal controls, such as segregation of duties, regular audits, and automated expense management systems, making it easier for fraudsters to exploit weaknesses within their system.
   
3. Lack of oversight and monitoring: In smaller organizations, oversight and monitoring of financial activities may be less stringent. Employees in small businesses may have more autonomy in managing expenses without rigorous scrutiny or approval processes seen in larger companies.
   
4. Less adherence to financial policies: The organizational culture within small businesses may not prioritize compliance, ethical behavior, or adherence to financial policies as strongly as larger corporations, contributing to increased susceptibility to fraud.
   
5. Disproportionate financial impact: While larger companies may experience higher-dollar fraud schemes, small businesses can be disproportionately affected by the financial impact of fraud. Losses from expense fraud can have a significant cumulative effect on their financial health and sustainability.
   
6. Minimum fraud detection measures: Detecting fraud can be more challenging for small businesses due to limited tools, data analysis capabilities, and internal audit functions. Many SMBs do not have the means to implement proactive fraud detection measures.

6 Steps small businesses can take to overcome expense fraud

1. Establish built-in policies and procedures: Create clear expense policies outlining reimbursable expenses, spending limits, approval processes, documentation requirements, and consequences for fraudulent behavior.
   
2. Use a modern expense management tool: Use expense management software or apps to streamline expense reporting, automate approval workflows, flag suspicious transactions, and gain real-time visibility.
   
3. Utilize analytics tools to gain insights: Analyze transaction data to gain visibility into spending patterns and detect anomalies that may indicate fraudulent behavior to proactively address potential fraud risks.
   
4. Implement spending controls on charge cards: Set built-in spending limits based on charge cards by job role and responsibility. Deactivate a card immediately in case of suspected fraud or unauthorized transactions.
   
5. Enhance oversight and monitoring: Increase oversight and monitoring of financial activities, including expense reporting, audits, and data analysis. Utilize internal controls, such as dual approvals for high-value expenses.
   
6. Provide ongoing training and education: Offer training sessions on expense policies, procedures, compliance requirements, and fraud prevention techniques. Keep employees informed of these policies on a regular basis.

Take proactive measures to future-proof your business from expense fraud

Protecting your business against expense fraud is essential for safeguarding your bottom line and maintaining trust within your organization. By implementing built-in expense policies, leveraging analytics tools, and utilizing features like instant card disablement, SMBs can mitigate the risk of fraud and ensure financial integrity. 

With Finfare as your partner, you can confidently navigate the complexities of expense management and protect your business from fraud. Our expense management platform provides small businesses with the tools and capabilities to protect against expense fraud effectively.

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