By Paul W. Pocalyko, CPA, CFF, CFE
On Dec. 28, 2017, I began a two-part blog on the fraud threats that small businesses face every day. The first blog focused on common internal frauds that occur in the small-business environment. In part two, I turn to the some of the most pervasive external activities that can cause harm to the small-business owner.
There is a strong motivation among business owners to see increasing sales and increasing profits. That drive is used by many enterprising criminals to perpetrate a list of scams that can threaten a business’s operations.
Know your customer, confirm the validity of credit card transactions, and do not ship goods until you are certain the funds are valid.
Payment scams take many forms, and generally involve paying a small business with either a stolen credit card or a fake check. It is hard for a small-business owner to determine if a payment is valid. There are, however, a few tips that can potentially eliminate the loss. Certainly, knowing your customer is always a best practice. More importantly, identification should always be obtained when a check is presented. This becomes more complicated with a credit card as the rules surrounding ID verification are governed by the agreements with credit card companies. While the systems in place are improving, the small-business owner who accepts a stolen credit card can face both the loss of the product and charge-backs for accepting the stolen credit card.
Don’t be a victim of a scam that requests immediate payments on overdue balances. Perform independent verification of all alleged amounts owed and authenticate the payee.
There are several stories circulating about phone calls or e-mails to small businesses relating to a complaint filed with the Better Business Bureau, unpaid tax obligation, or an unpaid utility billing. Each of these involves the request for an immediate monetary payment to clear up the matter. Simply asking questions and pushing back politely will often reveal the true nature of the inquiry. There is no doubt the most clever miscreants will have set up a fake website, have false credentials, and even threaten criminal actions. They may also have obtained business-identifying information.
Be cautious of consultants who require large upfront fees to obtain loans or investments. Consult your trusted advisers, including your CPA and legal counsel, before entering into such agreements.
I have seen many attempts by outside “consultants” to offer a range of services to assist a small-business owner – often with the promise to sell the business for a huge amount of money or obtain investment capital. Most often these require the payment of thousands of dollars in upfront fees for valuations and the creation of a package to provide prospective buyers, lenders, or investors. Most of these consultants will prepare packages, and some may distribute those to outside parties, but often there is little more done to truly aid in either a sale or obtaining a loan or investments. If you are considering any of these options for your business, consult with your trusted advisers, including your CPA.
Any time a small business enters into a written agreement, have a legal team review the terms and conditions.
Small-business owners are often bombarded with requests to pay for advertisements in any number of formats. This often occurs near the calendar year end with the pitch, “You can get a lot for your money next year.” I had a client who used six billboard advertisements for a few years. He had some modest success, but after fewer and fewer new customers mentioned the billboards, he canceled the agreement. He sent proper notice and called the agency to confirm the cancellation. He was informed that his agreement had been automatically renewed, and that he would be billed for a full new year. He noted that the agreement had no renewal option, and that his advertisements had already been removed from display. He then took date-stamped photos of the new billboard ads. Nonetheless, the agency entered a demand for arbitration seeking recovery of a full year of fees. It contended that the renewal was valid. My client prevailed at the arbitration, but he was forced to incur legal fees due to an ambiguity in the original agreement.
There is no simple way that a small business can avoid or eliminate the attempted scams that are perpetrated throughout the market. Small businesses do not have the people, the internal controls, and the risk management typically in place in large entities.
Small business owners must be vigilant in their operations to identify the risks – both external and internal – that are likely to confront them each and every day.
Paul W. Pocalyko, CPA, CFF, CFE, is with HKA in Philadelphia. He can be reached at firstname.lastname@example.org.