How to Protect Yourself and Your Business From Fraud
From Fyre Festival to Theranos to Anna Delvey, the so-called SoHo Grifter, fraud is having a moment these days. It seems lots of people are happy to rid themselves of those pesky ethics in exchange for money or some other badge of success.
How can entrepreneurs protect themselves and their companies from such nefarious people and schemes? Follow these five tips to keep yourself and your business shielded from fraud, no matter what the source.
1. Learn how to do your own due diligence to avoid fraud.
We all want to be able to trust the people and companies with whom we do business. However, as the above examples clearly demonstrate, some people aren’t trustworthy. And sometimes, the facts are far from what they’ve been represented to be. That’s why it’s so important to learn the art of fact-checking. You must know how to do this whether it’s a new business partner or a new hire in the mail room.
First, identify what’s material to you. If you’re contemplating a new business deal where the other company’s revenue is part of the equation, then the amount of that revenue is material for you. Make a note of any fact that might change your decision if it’s being misrepresented in any way.
For each material fact, think of sources and methods you can use to verify that information. Who would know the truth about your potential partner’s revenue? What form could fact-checking that figure take? It may be that there is no readily available open source for verifying a specific fact. If that’s the case, insist on making your final consent contingent on the other party providing verified documentation.
Often, the person or party making the claim is the best place to start your fact-checking process. However, don’t simply take someone’s word for a specific assertion. If there is no proffered documentation, look for other sources to either refute or confirm what you’ve been told.
For hiring decisions, it’s essential to actually call and verify past employment and educational background. Make this a firm part of all your HR decisions and workflow in onboarding new hires or promoting current workers to positions with greater responsibilities.
2. Learn how and when to ask more (or better) questions.
The old adage “If something sounds too good to be true, it probably is,” applies to so many aspects of life and business. The alleged Theranos fraud was partially discovered by a marketing agency asking a question no one else had thought to ask.
If a potential venture partner or supplier is promising something that makes you think “Wow,” consider that your cue to do more digging. Inquire about the process in more detail. Ask to see prototypes, audited data or other supporting documentation. The responses you get and the way the answers are communicated can tell you if there’s a reason to keep investigating.
3. Separate fiscal duties to create checks and balances.
Fraud doesn’t only originate from external sources. It’s important to keep a watchful eye on your in-house systems as well.
For example, in the largest case of municipal fraud ever, an Illinois treasurer and comptroller bilked her town of almost $54 million. She evaded detection by accounting firms and regulators because multiple points of authority were vested in her office. Without checks and balances to stop her, she could create fraudulent accounts. She siphoned money. And, she used it as she pleased for years.
One of the best ways to do this is to create checks and balances by dividing up financial responsibilities. That way, no one individual can create and cover up a financial fraud.
4. Avoid the sunk-cost fallacy.
One reason the cost of fraud skyrockets so quickly is that humans often feel invested in a particular course of action. Some of the Theranos partners undoubtedly now wish they’d pushed harder on their earlier doubts. And many Fyre Festival employees and organizers kept pushing to meet the ultimate deadline even when they knew it wasn’t possible. They did this simply because they’d already expended so much time and effort.
If you find yourself stuck in a situation like this, don’t be afraid to extricate yourself and your company. Stop throwing good money after bad. It may well be more prudent to pay any costs associated with terminating an agreement than to continue to spend more trying to stay ahead of a disastrous outcome.
5. Trust comes from verifying.
U.S. politicians, in particular, are fond of quoting President Reagan. He, in turn, was fond of quoting an old Russian proverb that translated to “Trust, but verify.” It's a great soundbite, suggesting Americans were honest and acting in good faith, but weren’t fools. We wouldn’t just take the Soviets at their word.
In actuality, that phrase is somewhat meaningless. If you’re verifying, that pretty much means there’s a lack of trust there already. In addition, if you trust, you generally don’t care too much about verification.
Instead, adopt a revised version of that phrase as your new motto. “Trust comes from verifying.” In other words, you will extend trust once it’s been earned. In the meantime, check every reference. Examine every document. Do your due diligence, whether it’s for a business partnership or a new sales hire.