Small business fraud prevention guide and checklist

Quick insights

Protecting your small business from fraud and scams is not just about reacting to threats as they happen; it’s about building a resilient environment where vulnerabilities may be minimized from the start without overwhelming the business owner.

While often used interchangeably, fraud occurs when a criminal gains unauthorized access to your accounts, information or funds without your knowledge; a scam occurs when a fraudster manipulates you into voluntarily sending money or sharing sensitive information. Recovery from scams is often harder because you authorized payment or shared information with scammers.

Read on to learn about common threats, ways to spot them and ways to prevent them to help secure your company’s reputation, data and finances.

Keep in mind the fraud prevention tips shared here are meant as general guidance, and it’s always a good idea to consult with professionals about your specific situation.

Common types of fraud impacting small businesses

Fraudsters often evolve their tactics to exploit vulnerabilities in business processes. Recognizing the methods they use can be a helpful component of business fraud protection.

Below are several common threats that frequently impact small businesses, along with the typical warning signs associated with each.

Phishing

Phishing scams remain as one of the most prevalent types of scams used by cybercriminals. Scammers may send deceptive emails, text messages or direct messages that appear to come from a trusted source, such as a bank, a vendor or a government agency. The goal is typically to trick the recipient into revealing sensitive information like login credentials or financial details.

Warning signs: A sense of extreme urgency in communications, threats of account suspension, requests for sensitive data, mismatched email domains, poor grammar and unexpected attachments or links.

Imposter fraud

Imposter fraud is also known as business email compromise (BEC) or vendor impersonation. Fraudsters may impersonate executives, vendors or clients to convince employees to send payments or change payment instructions. Always verify payment requests through a separate, trusted communication channel.

Warning signs: Sudden and/or unexplained changes to payment instructions, urgent requests that bypass standard approval channels, requests for secrecy and pressure to act quickly without verifying the details.

Check fraud

Despite the rise of digital payments, paper business checks are still widely used and remain a target for fraudsters. Check fraud can involve stealing physical checks from the mail, forging signatures or altering the payee name and amount—a process known as check washing.

Prevention tips include:

Warning signs: Missing checks from a checkbook, discrepancies between the payee name on a cleared check and the original invoice and complaints from vendors who have not received their expected payments.

Services not performed

Services not performed fraud typically occurs when a business is billed for services that were never rendered or products that were never delivered. A common example may be a deceptive invoice for a website domain renewal or a business directory listing that the company never requested.

Warning signs: Vague invoice descriptions, unfamiliar vendor names, invoices that lack a corresponding purchase order and sudden increases in billing volume from a previously low-activity vendor.

Cybersecurity threats

Beyond phishing, small businesses may face a range of digital cybersecurity threats, including malware, ransomware and data breaches. Malicious software can infiltrate a company's network, locking access to critical files until a ransom is paid or quietly siphoning sensitive customer data.

Warning signs: Unusually slow computer performance, locked files, unexpected pop-up messages and alerts from antivirus software indicating that a system has been compromised.

Business and government impersonation scams

Scammers sometimes pretend to represent government agencies, such as the IRS, local tax authorities or well-known businesses like utility companies. They may call retail stores or offices claiming that the business owes back taxes or utility payments, threatening immediate consequences like shutting off the power during business hours.

Warning signs: Alleged government agencies or businesses demanding immediate payment; requests for payment via wire transfer, cryptocurrency or prepaid gift cards; and threats of legal action or service disconnection.

Ways to prevent small business fraud: checklist

Preventing fraud isn’t necessarily a one-time event; rather, it is an ongoing process. Establishing strong internal controls may help ensure that errors and malicious activities are caught early.

The below checklist outlines areas to routinely review to help prevent fraud in your business operations.

Reviewing outgoing transactions

A standard item on a fraud checklist often involves careful review of outgoing payments. Matching every invoice to a corresponding purchase order and delivery receipt is a common practice that may help verify the legitimacy of an expense.

Many businesses also establish a formal vendor verification process. When a vendor requests a change to their payment details, verifying the change by calling the vendor at a known, trusted phone number (rather than replying to the email requesting the change) can be an added security measure.

Auditing your payroll records

Payroll fraud (such as the creation of "ghost employees" or the unauthorized alteration of timesheets) can drain a company's resources. Regular audits of payroll records may be a typical method for identifying discrepancies.

A common checklist item for small business owners may involve periodically reviewing the payroll roster to help ensure that all listed individuals are current, active employees, and that compensation rates match approved records.

Separating duties with dual control approvals

Relying on a single individual to manage all financial transactions may create vulnerability. Implementing dual control (a system where one person initiates a payment and a second, separate person approves it) can be a helpful component of small business fraud prevention. For remote teams, this often involves using cloud-based accounting software that requires digital sign-offs from two different user accounts.

This separation of duties may help ensure that no single employee has unchecked access to the company's funds, which could reduce the risk of internal fraud and may help catch external scams before funds are released.

Strengthening email and password protections

Utilizing strong, unique passwords for all business accounts and updating them on a regular schedule is a common security practice for businesses. Many organizations also use password managers to generate and store complex passwords, which may reduce the likelihood of employees reusing the same password across multiple platforms.

Enabling multi-factor authentication

Multi-factor authentication (MFA) adds an extra layer of protection beyond a username and password. By requiring a second form of verification (such as a code sent to a mobile device or a biometric scan) businesses may make it harder for cybercriminals to gain unauthorized access to email accounts, financial software and banking portals.

Training employees to recognize fraud

Employees are often the first line of defense against fraud. Regular employee cybersecurity training sessions may help staff recognize the latest scam tactics, such as how to spot a phishing email or how to handle a suspicious phone call. A well-informed team may be more adept at identifying warning signs and following established security protocols.

Setting up account alerts for suspicious activity

Conducting financial transactions over secure, private networks rather than public Wi-Fi is a common practice for protecting sensitive data. Additionally, monitoring bank and credit card accounts can be a helpful checklist habit.

For business owners who lack the time to review accounts manually every day, setting up automated text or email alerts for transactions over a certain dollar amount can be an effective way to spot unauthorized charges quickly.

Leveraging your bank's fraud protection services

While internal controls and cybersecurity measures can be helpful, partnering with a financial institution may offer an additional layer of defense when it comes to protecting your business from fraud.

Many financial institutions see fraud patterns across thousands of businesses daily, which may help them more easily identify threats. Understanding the fraud protection services provided by banks can be a helpful component of a comprehensive security strategy.

Some benefits of having a business bank account include services such as:

Using these services may shift some of the monitoring burden from you and your team to automated, highly secure banking systems. When choosing a bank for your business, you may want to prioritize accounts that offer robust and customizable fraud prevention tools.

Frequently asked questions

What should businesses do first when fraud is suspected?

Many businesses immediately contact their financial institution to freeze affected accounts and potentially halt unauthorized transactions. It can also be helpful to report the incident to local law enforcement and relevant government agencies.

Are small businesses more vulnerable to fraud than large corporations?

Small businesses are often targeted because they may lack the dedicated IT departments and complex security infrastructure of larger corporations. However, implementing strong daily controls and using business bank services may help level the playing field.

How often should a business update its fraud prevention checklist?

Industry standards suggest reviewing and updating security protocols at least annually or whenever there is a significant change in business operations. More regular updates may help ensure that defenses keep pace with new and evolving scam tactics.

Does business insurance cover losses from fraud?

Some business insurance policies offer specific endorsements for cyber liability or employee dishonesty, but coverage varies widely by provider. Business owners may want to consult with their insurance agent to understand exactly what types of financial crimes may be covered under their specific policy.