Many people think small-to-medium sized, private businesses are less susceptible to fraud than large corporations. That might seem like a logical conclusion because these operations are usually run by the owner with many trusted, longtime employees on the payroll.
Unfortunately, it’s not true. According to the Association of Certified Fraud Examiners (ACFE) Report to the Nations on Occupational Fraud and Abuse, small, privately held companies are more likely to become victims of fraud than public companies, governmental and not-for-profit agencies.
Upon reflection, maybe this makes some sense after all because smaller organizations are often unaudited and have not installed appropriate anti-fraud measures.
Small businesses often dealt a crippling blow
The ACFE study estimates that organizations globally lose 5 percent of revenues to fraud each year. Roughly 32 percent of the fraud incidents in the study were committed in businesses having fewer than 100 employees.
The news gets worse. The median small business fraud loss was a hefty $200,000 per scheme. This is compared to median losses of nearly $127,000 for public companies, $100,000 for not-for-profit agencies, and $81,000 for governmental agencies. The size of the losses is attributable in part to the fact it typically takes 18–36 months for fraud schemes to be uncovered.
The bottom line is the cost of an occupational fraud to a small company can be much more likely to deal a crippling financial blow. Some small companies have been left bankrupt in the aftermath of fraud schemes.
Small businesses are more vulnerable to occupational fraud for three primary reasons:
• Smaller companies tend not to have anti-fraud controls in place. Anti-fraud controls include management review, employee support programs, hotlines, fraud training for employees and managers, anti-fraud policies, job rotation/mandatory vacations, surprise audits and others.
• For many years, ACFE reports have shown that tips are the number one means by which fraud is detected. However, most small companies don’t have hotlines for employees, vendors and customers to report observed instances of fraud. Anonymous reporting mechanisms have a significant impact on fraud detection.
• Smaller organizations often don’t have sophisticated internal financial controls that are designed to make occupational fraud difficult, if not impossible, to commit. Too often, this means employees handle many duties, which makes it easier to cover or destroy the audit trail that would reveal fraud.
In addition, many long-term, trusted employees’ activities are often not even monitored.
So what can you, as an owner or manager, do to avoid crippling losses? Your primary focus should generally be finding ways to detect and prevent the two most common types of occupational fraud that plague small businesses:
• Asset misappropriations such as billing schemes, skimming from cash receipts and the outright theft of inventory.
• Corruption such as collecting kickbacks from suppliers, giving unwarranted discounts to friends and relatives and selling sensitive information to competitors.
Based on the preceding facts, you might decide to implement measures designed to more accurately track cash. Focusing on the logistics of how cash enters and exits your business can reveal problems and allow you to stop potential cash leaks.
Working with a qualified CPA or Certified Fraud Examiner to implement sound internal controls and fraud prevention techniques is often the first step to preventing fraud in your organization.
Patrice Sebastian is a senior manager in WebsterRogers LLP’s Valuation and Forensic Services department. She specializes in fraud detection and prevention, litigation support and expert witness testimony and can be reached at 877-512-0001.