How can I spot fraud in my business?
Fraud is like mold — if you see it, there’s already more growing where you can’t.
Many business owners think, “That’s my bookkeeper’s job.” But here’s the reality:
By the time a bookkeeper catches fraud, the money is often long gone, the damage is done, and the recovery process is messy at best.
Being proactive doesn’t mean you’re suspicious of everyone. It means you’re a responsible steward of your company’s resources. In this guide, we’ll cover:
The common signs of fraud (and why they’re easy to miss)
Practical ways to detect it early — without turning into a full-time auditor
Prevention strategies that keep your team honest and your cash flow clean
1. Why Small Businesses Are Prime Targets for Fraud
Small businesses are more likely to experience occupational fraud than large corporations, according to the Association of Certified Fraud Examiners (ACFE). Why?
Fewer internal controls — One person may handle multiple financial duties.
Tighter-knit teams — Trust sometimes replaces verification.
Limited oversight — Owners often focus on sales and operations, not daily financial details.
Fraud is often committed by trusted, long-term employees who see an opportunity and justify it with thoughts like, “I’m just borrowing it” or “They’ll never notice.”
2. The Three Main Types of Business Fraud
To spot fraud, you need to know the forms it takes:
Asset Misappropriation – The most common, involving theft of cash, inventory, or other assets. Examples:
Skimming from daily sales
Fake vendor invoices
Personal purchases on company credit cards
Corruption – Involves bribery, kickbacks, or conflicts of interest. Examples:
An employee accepting payment from a vendor for preferential treatment
Inflating vendor prices in exchange for personal gain
Financial Statement Fraud – The rarest, but most damaging. Examples:
Falsifying revenues or expenses to hide theft or attract investors
3. Red Flags: Early Warning Signs of Fraud
Fraud rarely starts with a grand scheme — it often begins small. Watch for these signs:
Behavioral Red Flags:
Employees refusing to take vacation (afraid someone will discover irregularities)
Sudden lifestyle changes without a clear income source
Overly defensive when asked about financial processes
Extreme control over certain financial areas
Transactional Red Flags:
Vendor payments with no supporting invoices
Duplicate payments to the same vendor
Unexplained cash shortages
Accounts that never reconcile cleanly
Out-of-sequence checks or missing check numbers
System Red Flags:
Frequent password changes without IT approval
Missing or altered financial records
“Rounding” entries that avoid cents
4. How to Check for Fraud Without Micromanaging
You don’t have to become a forensic accountant — but you do need a process.
Spot-Check Bank Statements
Don’t just look at balances. Skim through payees and transaction descriptions for anything unusual.
Reconcile Accounts Yourself (Periodically)
Even if your bookkeeper reconciles monthly, do your own quarterly review to ensure all deposits and withdrawals match your records.
Random Expense Audits
Choose 5–10 random expense transactions each month. Verify supporting receipts and approvals.
Review Payroll Reports
Look for “ghost employees” (people being paid who don’t actually work there) or unexplained bonuses.
Watch the Vendor List
Review all active vendors quarterly to spot fake companies or duplicates.
5. The Power of Segregation of Duties
One of the most effective fraud prevention methods is splitting financial responsibilities:
The person who approves expenses shouldn’t be the same person who issues payments.
The person who records deposits shouldn’t be the one reconciling accounts.
In a very small business, this might mean you, the owner, personally approve all payments and bank transfers — even if you don’t physically issue them.
6. Technology as Your Early Warning System
Modern accounting software can catch red flags automatically:
QuickBooks Alerts – Flags duplicate transactions or unusual vendor activity.
Bank Rules – Highlight transactions outside normal patterns.
Expense Management Apps (Expensify, Divvy, Ramp) – Require receipt uploads for every purchase.
But remember: software is only as good as the human reviewing it.
7. The Psychology Behind Fraud
Understanding why people commit fraud can help you spot it earlier. The Fraud Triangle explains it:
Pressure – Financial hardship, debt, addiction, or lifestyle needs
Opportunity – Weak internal controls or lack of oversight
Rationalization – Convincing themselves it’s temporary or justified
Look for signs of stress in your team. A sudden shift in demeanor, attendance issues, or secrecy can indicate personal struggles that might lead to risky decisions.
8. Prevention Strategies That Actually Work
Mandatory vacations – Forces another person to handle their duties, increasing the chance irregularities will be spotted.
Surprise audits – Keeps employees aware that oversight is random and ongoing.
Tight vendor approval process – Verify all new vendors through an independent check.
Clear fraud policy – Outline consequences and reporting procedures in your employee handbook.
Whistleblower channels – Let employees report anonymously without fear of retaliation.
9. What to Do if You Suspect Fraud
Don’t confront immediately — You need evidence first.
Secure financial records — Back up digital data and lock paper files.
Contact your attorney — They’ll guide you on next steps.
Hire a forensic accountant — They can investigate without alerting the suspect.
Review internal controls — Fix the weaknesses that allowed it to happen.
10. Why This Matters Even If You Trust Your Team
Trust is essential in business — but so is verification. Fraud isn’t always committed by “bad people”; sometimes it’s good people under pressure making terrible choices.
If you implement checks and balances now, you’re not just protecting money — you’re protecting relationships, your reputation, and your peace of mind.
Conclusion & Call to Action
Spotting fraud before your bookkeeper does isn’t about suspicion; it’s about ownership of your role as the financial guardian of your business.
By watching for red flags, doing periodic spot-checks, and setting strong internal controls, you’ll reduce your risk dramatically — and if something is wrong, you’ll catch it while it’s still fixable.
If managing all this sounds like one more hat you don’t have time to wear, Salsbury & Co. can help. Our bookkeeping and advisory services not only keep your records accurate but also build in fraud prevention measures that give you confidence and clarity.
This Q&A does not constitute legal, accounting, or tax advice and
does not address state or local law.
