How to Spot Fraud in a Small Business

Fraud is one of those topics that feels awkward to bring up because it sounds like you’re accusing someone, especially when your business is built on trust.

Most owners don’t want to believe an employee, partner, or vendor would take advantage of them. That mindset is completely normal. The problem is that fraud usually doesn’t announce itself, it quietly blends into the everyday chaos of running a business and grows until the damage is hard to ignore.

Why Small Businesses Are Easy Targets 

Small businesses are built for speed and flexibility, not layers of approval. One person might handle invoices, approve bills, run payroll, and reconcile the bank account. That kind of setup isn’t supposed to be careless, but practical. 

Even honest mistakes can turn into major problems when no one is reviewing activity regularly. Clean systems protect you whether fraud exists or not.

What Fraud Actually Looks Like Day to Day

Fraud in real life is usually boring, which is why it works. It may show up as:

• Duties are concentrated in one role
• Reporting is delayed or inconsistent
• Owners are focused on growth, clients, and delivery
• Financial reviews happen infrequently

Even honest mistakes can turn into major problems when no one is reviewing activity regularly. Clean systems protect you whether fraud exists or not.

The First Warning Sign Is Usually a Feeling

Owners often tell us they “just had a weird feeling” before they found anything concrete. Cash feels tighter than expected. Payroll seems high for a slow period. Expenses don’t line up with activity. That instinct matters. 

Healthy businesses do not constantly surprise their owners financially. When the numbers start drifting away from what “normal” looks like, it’s a signal to look closer and understand what’s happening.

Your Bank Activity Is the Most Honest Report You Have

Your bank statement shows what actually cleared, not what was planned. Reviewing bank activity regularly is one of the simplest ways to catch problems early.

Watch for: 

• Payments you do not recognize, Withdrawals that do not match your normal behavior transfers that feel out of place.
• Unusual timing (late nights, weekends, holidays).
• Recurring small charges that don’t match real vendors.

Fraud often hides in repetition. A small monthly charge can run for years if no one is paying attention.

Your Financial Reports Should Not Be a Surprise Every Month

Disorganized financials don’t cause fraud, but they make it much easier to hide. If your profit and loss statement feels confusing every month, you’re not alone — but that confusion creates risk.

Red flags include:

• Overused “miscellaneous” or “other” expense categories

• Frequent manual journal entries without explanation

• Late reclassifications that change results after the fact

• Books that are always behind

A consistent monthly close gives you a chance to catch issues while they’re still manageable.

Who Can Create, Approve, and Pay Something?

Fraud risk skyrockets when one person controls a transaction from start to finish. That could mean creating a vendor, entering an invoice, approving it, and releasing payment without anyone else reviewing the details. 

It could also mean adjusting payroll, changing direct deposit information, and running the pay cycle without a second set of eyes. Even trustworthy people can make mistakes, and systems should be designed to catch mistakes before they become expensive.

You do not need a large team to reduce the risk. Even simple separation where one person prepares and another reviews makes fraud much harder to sustain quietly. Systems should be designed to catch mistakes before they become expensive.

Vendor Fraud Is Often the Quietest Leak

Vendor payments feel routine, which makes them easy to overlook. Fraud can appear as:

• Duplicate invoices

• Charges for work not performed

• Inflated hours or rates

• Fake vendors created internally

Review vendors periodically. Look for similar names, repeated round-dollar invoices, vague descriptions, or constant “urgent” payment requests designed to shut down questions.

Expense Reports and Reimbursements Can Get Weird Fast

Expense fraud usually starts small: an extra receipt,  rounded mileage, or personal spending mixed “just this once. Over time, those habits add up. 

Some patterns to watch can be: Missing receipts, frequent “client meals” without client names, repeated reimbursements that fall just under an approval threshold, and claims clustered around payroll dates.

Trends matter more than one-off mistakes. 

Payroll Fraud Can Hide in plain sight 

Payroll runs on a schedule, which makes it easy to assume it’s correct. Time padding, fake overtime, ghost employees, and unauthorized pay rate changes are more common than most owners want to believe.

Payroll processors don’t validate reasonableness, they process what you submit. A brief review each cycle can prevent months of quiet losses.

Refunds, Discounts, and Voids are High Risk areas 

If your business processes refunds or discounts, visibility matters. Fraud can involve fake refunds, unauthorized discounts, or voided transactions that cover cash theft.

Compare refund activity by employee and watch timing. When refunds increase without a rise in customer complaints, it’s time to investigate.

Inventory Shrink That Keeps Repeating Is Not Just “Shrink”

Inventory loss happens, but steady, unexplained  shrink is not normal. Fraud often hides inside categories like “spoilage,” “breakage,” or “adjustments.” If those numbers keep climbing, your system may be masking an issue.

Quick Fraud Check You Can Do in 15 Minutes

1. Scan the Bank and Credit Card Feeds: Look for unfamiliar vendors, odd timing, and repeated small payments that do not match invoices.
2. Sort Expenses by Amount: Identify the top 20 transactions for the month and confirm each one makes sense operationally.
3. Review New Vendors: Confirm who added them, why they were needed, and whether they have proper contact details on file.
4. Check Refund Activity: Compare refunds and voids by employee and flag anyone who is dramatically higher than the rest.
5.  Skim Payroll Summary: Look for unusual overtime, rate changes, manual checks, or reimbursements that feel out of pattern.

How to Ask Questions Without Destroying Trust 

Approach investigations like a process review, not an accusation. 

Use neutral language and stay focused on facts: documentation, approvals, or constantly changing. Calm questions protect your culture and surface facts faster than emotional reactions.

If answers are vague, inconsistent, or constantly changing, that’s when deeper review makes sense

The Controls That Stop Fraud Without Slowing You Down

The right controls reduce stress, they don’t create it. When approvals are clear and documentation is consistent, you stop second-guessing every expense: 

• Require approval for new vendors, set dollar thresholds for expense categories, and make bank reconciliations non-negotiable. 
• Limit who can change payment details.
• Consistent monthly reporting helps you spot problems early, which is the real goal.

How to Spot Fraud in a Small Business Before It Gets Expensive

Fraud rarely starts big, but it almost always grows quietly when no one is looking closely. The sooner you strengthen your financial controls and review your numbers with intention, the easier it is to prevent small issues from becoming expensive setbacks. Red Bike Advisors helps small businesses improve reporting, tighten internal controls, and investigate concerns with discretion and clarity. If something feels off or if you simply want stronger systems in place, contact Red Bike Advisors today and take the next step toward protecting your cash flow and your peace of mind.