Fraud Prevention Solutions for Small Business Owners

Small organizations with fewer than 100 employees suffer median losses of $141,000 per fraud case — the second-highest loss among all organizational size categories, according to Occupational Fraud 2024: A Report to the Nations (Copyright 2024 by the Association of Certified Fraud Examiners, Inc.). For a small business, that kind of hit can be devastating. Yet many companies delay small business fraud prevention until after a loss, viewing it as an expense rather than an investment in the longevity of a business. For a small business, that kind of hit can be devastating. Yet many companies delay small business fraud prevention until after a loss, viewing it as an expense rather than an investment in the longevity of a business.

This guide breaks down fraud risk management for small businesses, including practical internal controls like employee screening and background checks, without the need for a dedicated compliance team.

Understand Different Types of Fraud

Criminals can target companies in a variety of ways to steal money, private customer data, or other proprietary information.

• Internal Fraud: Also known as occupational fraud, it’s carried out by employees with access to company systems, funds, or data. Common examples are expense reimbursement fraud (submitting personal expenses as business costs), time sheet fraud, and employee fraud involving inventory theft.
• External Fraud: This happens outside your organization and involves vendor fraud (fraudulent invoices from fake suppliers), customer payment fraud (returned checks, disputed charges), and identity theft schemes that target your business credit.
• Payment Fraud: This encompasses everything from check fraud and wire fraud to ACH and credit card fraud. Payment fraud attacks the transaction itself rather than going after employee access or vendor relationships.
• Cyber Fraud: Digital tactics that steal money, credentials, or data fall under this category. It can happen through phishing attacks, ransomware, account takeovers, and malware. Business email compromise (BEC) is another common scam where criminals impersonate a business owner or employee to make the request appear legitimate.

Common Scams Affecting Small Businesses

Every fraud scheme relies on manipulating people. Whether it's an employee unknowingly clicking a malicious link or deliberately stealing funds, the human element remains central to how fraud succeeds. Understanding these common scams — identified by the Federal Trade Commission — helps you train your team to recognize threats before they cause damage.

• Fake Invoice Scams: You receive professional-looking invoices for office supplies, services, or subscriptions you never ordered. Scammers hope your bookkeeper will assume someone authorized the purchase and pay without verifying. Some call first to "confirm" an order or "verify" your address, then send unwanted merchandise followed by aggressive payment demands. Never pay invoices unless you can verify someone in your organization authorized the purchase.
• Directory Listing Scams: A caller offers a "free" business listing or asks to "confirm" your information for an existing directory entry. Days later, an invoice arrives demanding hundreds or thousands of dollars for a service you never authorized. Before paying for any directory or advertising service, verify that someone at your company actually ordered it.
• Government and Utility Imposters: Someone claims to be from the IRS, your utility company, or another official entity, threatening immediate consequences unless you pay right away. Real agencies send written notices before taking action and never demand payment through wire transfers, cryptocurrency, or gift cards. If you receive an urgent call, hang up and contact the organization directly using official contact information.
• Overpayment and Fake Check Schemes: A new customer sends a check for more than they owe and asks you to wire back the difference. The check is fake, but takes days or weeks to bounce. By then, you've wired money to the scammer and your bank holds you responsible for the full amount. Never accept overpayments or wire money based on checks that haven't fully cleared.
• Business Coaching and Promotion Scams: Fraudsters use fake testimonials and high-pressure tactics to sell "exclusive" business coaching or internet marketing systems that promise guaranteed results. They lure you with low initial costs, then demand thousands more for additional "levels." Before investing, research the company thoroughly and be skeptical of guaranteed results or pressure to pay immediately.
• Review Manipulation Offers: Companies claim they can remove negative reviews or post fake positive reviews to boost your ratings. This is illegal — the FTC requires that reviews reflect genuine opinions and experiences. Focus on encouraging satisfied customers to leave honest reviews instead.
• Credit Card Processing and Equipment Leasing Scams: Scammers promise lower processing rates or better equipment deals, but contracts contain hidden fees, long-term commitments you can't escape, or equipment that doesn't work. Some gain access to your accounts to steal funds directly. Carefully review contracts and research companies before switching processors or leasing equipment.

Payment Fraud Prevention

Small businesses are prime targets for cyber fraud, and digital payment fraud is as dangerous as traditional theft. These attacks often target email systems and exploit employee trust. A three-pronged approach provides strong defense: securing your email, training your team to question suspicious requests, and controlling who can access your financial systems.

• Business Email Compromise (BEC) Defense: This is where criminals impersonate executives to commit CEO fraud or vendors to request fraudulent payments. In 2024, BEC cost businesses $2.77 billion. To defend against BEC:
  • Implement Email Authentication Protocols: Sender Policy Framework (SPF) and Domain-based Message Authentication, Reporting & Conformance (DMARC) verify that emails are actually from who they claim to be and help email systems decide whether to deliver suspicious messages. If you use a private domain for your business email, work with your IT provider to set these up. Major email providers like Google and Microsoft include these protections natively for their services.
  • Require Out-of-Band Verification: Establish a policy requiring any request to change payment information to be confirmed by phone before processing—never rely solely on email confirmation.
• Phishing and Social Engineering: Social engineering attacks manipulate employees into revealing sensitive information or transferring money. These attacks come in multiple forms:
  • Phishing (Email): Fraudulent emails designed to steal passwords or trick employees into making payments. These often create urgency and impersonate trusted sources like executives, vendors, or service providers.
  • Vishing (Voice Calls): Phone scams where attackers impersonate banks, government agencies, IT support, or company executives to extract sensitive information. Scammers can fake caller ID to appear legitimate.
  • Smishing (Text Messages): Fraudulent texts that create urgency around account issues, package deliveries, or security alerts, prompting employees to click malicious links or share credentials.
• Account Security and Access Controls: Account compromise poses significant risk, particularly for financial systems like payroll and banking. Multi-factor authentication (MFA) is one of the best defenses — require it on all financial accounts and use strong authentication methods like authenticator apps or hardware keys. Implement least privilege access, granting employees only the permissions their roles require. Deploy password managers to help staff maintain unique, strong passwords across work and personal accounts, and configure automatic logout after inactivity.

Review Internal Controls and Separation of Duties

A 2024 ACFE study found that a lack of internal controls was the most prominent organizational weakness contributing to occupational fraud. Examples of internal controls small businesses use can include the following:

• Separate Accounting From Cash Handling: The person recording transactions in your accounting system shouldn't be the same person depositing checks or accessing cash. If you're too small for this separation of duties, the owner should review bank statements and reconciliations themselves.
• Incorporate Checks and Balances Through Documentation: Create written procedures that require manager approval for purchases above a specific amount. Random audits can serve as additional checks and balances to help ensure employees are following procedures.
• Limit Access to Incoming Payments: Banks offer lockbox services to send payments directly to the bank, bypassing human hands. If this isn’t possible, require two people to be present when opening mail containing checks.
• Audit Time and Attendance Reports: Review time sheets for patterns that suggest time sheet fraud, such as consistently exact 40-hour week, clocking in exactly on time, or an unusual spike in overtime. Also, verify that managers review and approve time sheets before payroll runs to prevent time sheet fraud.
• Reconcile Bank Statements Promptly: Reconcile bank statements promptly while transactions are still fresh. Remember to implement segregation of duties, where the person reconciling isn’t the same person signing checks or authorizing electronic payments.
• Screen Employees Before Hiring: Conduct screening and background checks appropriate to the role you are hiring for and where permitted by law, especially for positions involving accounts payable, accounts receivable, payroll, or banking access.

Educate Employees on Fraud Prevention

While the internal controls and security measures above help detect and prevent fraud, your best line of defense is your employees. You should educate your workforce on what procedures to follow, including how to report and document unusual activity.

Findings from the ACFE's 2024 Occupational Fraud report show that fraud typically lasts for 12 months before anyone notices. But it also found that organizations with anti-fraud controls experience lower fraud losses and quicker fraud detection than organizations without such programs in place. Assessing your business to identify points of vulnerability can help determine which fraud prevention solutions can work effectively. Given how easily just a single case of fraud can hurt a small business, consider putting a thorough employee fraud prevention strategy in place. A comprehensive strategy should cover:

• Red Flags to Watch Out For: Teach employees to recognize warning signs in their roles. For instance, accounts payable should question invoices from new vendors that don’t have proper documentation, invoices that add up to round numbers without proof, or duplicate invoice numbers. Train managers to recognize behavioral changes that could indicate insider risk — such as unusual access to sensitive systems, significant changes in work patterns, or signs of personal distress — and provide clear channels for reporting concerns confidentially to HR or security personnel.
• Clear Fraud Reporting Procedures: When employees know who to contact, what information to provide, and what happens next, they’re more likely to report suspected fraud. Multiple reporting channels can help, including options to report to a direct manager, HR, an anonymous hotline, or a fraud risk officer. Be clear that investigations will be confidential, and retaliation against good-faith reporters can result in termination.
• Verification for Financial Requests: Train employees on out-of-band verification — confirming requests through a different communication channel than the original request. This is critical for payment changes. For example, if someone requests to update vendor payment information via email, call the vendor directly using a known phone number to verify. One of the most common BEC scams involves fraudulent emails appearing to come from employees requesting direct deposit changes. Never process payroll or direct deposit changes based solely on email —always verify these requests by calling the employee directly at their known phone number. Require manager approval before processing unusual transactions and encourage employees to question any attempts to bypass standard procedures, which protects both your business and the employee from liability.
• Password Security: Compromised credentials are a common weak point for fraud to enter your organization. Credentials are often the targeted payload for social engineering schemes like phishing. Besides anti-fraud training to spot phishing emails and warn against sharing passwords, using a password manager and requiring MFA can safeguard your business.

Employees should receive security awareness training as part of new hire orientation and then at least once a year after that. Consider requiring more frequent sessions for staff in high-risk positions, such as accounts payable, payroll, or vendor management. Resources such as the Learning Management System from Paychex can help provide consistent fraud training across your entire organization. Typically, they let you pick and choose which courses to require and track who’s finished.

Quick-Start Fraud Prevention Checklist

This small business fraud prevention checklist has specific actions you can take to start implementing fraud prevention immediately. You can use it to track progress and identify gaps in your current setup.

People Controls

Your employees are both your first line of defense and your greatest vulnerability. These controls ensure your team has the training, oversight, and accountability structures needed to prevent and detect fraud:

• Annual Fraud Awareness Training: Schedule mandatory training for all employees covering fraud schemes, red flags, and reporting procedures. Consider quarterly training for high-risk roles.
• Quarterly Phishing Simulations: As part of your internal controls checklist, test employee awareness with realistic fake phishing emails. Provide immediate training to anyone who clicks malicious links or shares credentials.
• Separation of Duties for Critical Functions: Implement checks and balances for sensitive financial activities to prevent any single person from controlling a transaction from start to finish. For example, require dual approval for payments above a certain dollar threshold, with one person initiating the payment and another reviewing and approving it.
• Oversight and Rotation for Sensitive Roles: Build inspection and controls into critical financial functions to prevent any single person from maintaining unchecked control over processes. This can include requiring employees in sensitive positions to take time off where someone else performs their duties (allowing irregularities to surface), periodically rotating responsibilities among staff, or conducting surprise audits of high-risk areas like cash handling or payment processing.
• Background Checks for Financial Positions: Include employee screening and background checks, as allowed by law, before offering a candidate a position, or as part of an offer contingent upon a background check in accounts payable, payroll, banking access, or financial reporting. Laws on the scope and timing of background checks vary based on jurisdiction.
• Clear Fraud Reporting Channels: Set up multiple ways to report concerns (direct manager, HR contact, anonymous hotline, or designated fraud officer) and make sure your employees know how to use each channel.

Process Controls

Strong operational processes create checkpoints that catch fraud before it causes significant damage. These controls establish the workflows and documentation practices that make unauthorized activity visible:

• Segregation of Duties: Separate responsibilities for accounts payable, accounts receivable, and banking so that no single person controls a transaction from end to end.
• Vendor Onboarding Verification Checklist: Require documentation such as a business license, a W-9, proof of address, and phone verification before adding new vendors to your system.
• Monthly Bank Reconciliations: Bank reconciliations should be completed timely. Make sure the person doing the reconciling isn't the same person signing checks or sending payments.
• Quarterly Surprise Audits: Do occasional surprise checks on cash handling, petty cash, inventory, or expense reports to make sure employees are following processes.
• Invoice Approval Workflow: Put a process in place that requires formal approval before payments go through. Keep a documentation trail showing who authorized purchases and expenses.
• Regular User Access Reviews: Audit who has access to which system in your business and remove credentials right away when employees leave or move into a new role.
• Physical Document Security: Store blank checks, signature stamps, and sensitive paperwork in a locked spot. Keep track of who has keys or access codes.
• Vendor Statement Reconciliation: Match vendor statements to your accounts payable records monthly to catch fraudulent invoices or payment redirection.

Technology Controls

Digital systems require robust security measures to protect against both external attacks and internal misuse. These technical safeguards create barriers that make it exponentially harder for fraudsters to compromise your accounts and data:

• MFA on All Financial Systems: Set up MFA on banking portals, accounting software, payroll platforms, and email to require authentication codes in addition to passwords. As Christopher Voos, Fraud and Risk Analysis Manager at Paychex, explains: "Password breaches happen every day, MFA is what prevents them from becoming account takeovers. It forces attackers to prove they are you, not just that they stole your password."
• Password Manager Deployment: Give your team a password manager so they don’t use weak passwords or reuse them across business accounts. “When you reuse the same password across multiple accounts, a single breach can expose your entire digital life to takeover,” explains Voos. “Using a password manager is one of the simplest and most effective ways to protect yourself online.”
• Monthly Security Patching: Update operating systems and software monthly. Turn on automatic updates when you can.
• Email Authentication: Configure SPF, DMARC, and DKIM records through your email provider to stop spoofed emails from hitting your team’s inboxes.
• Device Encryption Requirements: Encrypt all laptops, tablets, and phones used for work. Make sure you can remotely wipe a device if it’s lost or stolen.
• Transaction Alerts on Bank Accounts: Enable real-time notifications for large payments, wire transfers, ACH payments, or changes to account settings.
• Regular Data Backups: Automate daily backups of financial and operational data. Test restoring a backup quarterly to make sure it actually works.
• Session Timeout Policies: Have financial systems automatically log out after a period of inactivity to prevent unauthorized access from unattended computers.

Banking Controls

Your bank accounts are the ultimate target for most fraud schemes, making banking controls critical. These measures work with your financial institution to verify transactions and block unauthorized access to your funds:

• Enroll in Positive Pay: Use bank services that match check numbers and amounts you've issued against checks presented for payment.
• Enable ACH Blocks and Filters: Allow only approved companies to pull money from your accounts via ACH. Block everyone else by default.
• Set Per-Transaction Limits: Establish maximum amounts for individual checks, ACH payments, and wires that match your company’s typical needs.
• Set Daily Transfer Limits: Cap total daily outgoing transfers below the highest amount you’d legitimately move to limit damage if accounts are compromised.
• Require Dual Approval for Wire and ACH Transactions: Configure banking systems so two authorized individuals must approve high-risk transactions before funds move.
• Daily Transaction Review: Designate someone to review the previous day’s bank activity each morning to catch unauthorized transactions within 24 hours.

Reporting & Response

When fraud occurs, speed matters. These preparations ensure you know exactly who to contact and what steps to take to minimize losses and preserve evidence:

• Internal Reporting Contact Designated: Assign a specific person (with a backup) to receive and investigate fraud reports. Communicate names and contact information companywide.
• Bank Fraud Hotline Documented: Post your bank's fraud reporting number somewhere easy to find so employees can access it immediately.
• SBA Office of Inspector General (OIG) Contact: Save the SBA OIG link to report suspected fraud or mismanagement of funds tied to SBA programs.
• FBI IC3 Complaint Link: Bookmark IC3.gov to quickly report BEC, ransomware, or other cyber fraud.
• Cyber Insurance Policy Reviewed: Check your cyber insurance coverage once a year to understand your limits, what’s covered, and how to file a claim if you ever need to.

What To Do If You Suspect Fraud

A quick response to suspected fraud minimizes financial losses. It also helps to preserve the evidence needed for recovery, prosecution, and control improvements. Here's a seven-step fraud response checklist.

• Isolate Immediately: Don't tip off the suspected individual. Instead, quietly suspend compromised accounts, revoke system access if needed, and secure all relevant documentation. Preserve the evidence before anyone can destroy it.
• Contact Financial Institutions: Call your bank's fraud desk immediately. Put holds on suspicious payments, provide fraud report details (account numbers, transaction dates, amounts, and payee information), and ask about recovery options.
• Preserve Evidence: Document everything. Save emails, take screenshots, and collect invoices and transaction records. Maintain the chain of custody for physical evidence — note who handled it, when, and how it was stored. Never delete or alter potential evidence, even if it seems irrelevant.
• File External Reports: Report suspected fraud to the appropriate authorities based on the type of fraud. For SBA loan or grant fraud, file reports with the OIG. For BEC, ransomware, or cyber fraud, file an FBI Internet Crime Complaint at IC3.gov. Contact your state attorney general's office for vendor fraud, consumer scams, or violations of state business regulations. Reporting fraud to local law enforcement makes sense for theft, forgery, or embezzlement.
• Notify Insurance Carriers: Contact your insurance company to file claims under your policy. Document all losses with supporting evidence and keep detailed communication logs with insurers, including dates, representatives' names, claim numbers, and decisions.
• Conduct an Internal Investigation: As part of your fraud incident response, consider bringing in a forensic accountant with experience in fraud investigations, especially if the fraud is significant or complex. Interview staff who may have been involved. Individually and confidentially. Review all related transactions, not just the ones initially suspected. Document your findings.
• Strengthen Controls: Conduct a postmortem asking: How did this fraud happen? What controls failed or were absent? What warning signs were missed? Who should have detected this earlier? Deploy corrective measures to close gaps and update employee training based on lessons learned from the fraud investigation.