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Fraud: A Big Threat to Small Businesses
 A recent study by the Association of Certified Fraud Examiners (ACFE) reiterates what many business owners know all too well: Job-related fraud can cause a huge cost and headache for employers. And, to make it worse, the study says that small to midsized businesses - those with fewer than 100 employees - are usually the hardest hit. And this may come as a surprise, but the most common fraud within the organization is not by a customer, but rather its own employee.
Why small businesses?
While the average loss per incident according to the ACFE is $159,000 - small to midsized businesses' median loss is $190,000. The most common occupational frauds in these organizations involve employees writing fraudulent company checks, skimming revenue and processing bogus invoices.
Many small to midsized businesses suffer high fraud losses because they fail to proactively detect wrongdoing. Less than 20 percent have internal audit departments, conduct surprise audits or provide fraud-detection training for their employees. Not surprisingly, small to midsized businesses usually uncover fraud accidentally rather than by any other means.
Several other factors contribute to the disproportionate rate of fraud among small businesses, including the familiarity and level of trust between employees which usually results in fewer questions from other employees and managers. Another factor is the idea that fraud is only a problem with large companies. This attitude, combined with a lack of awareness and education, often leads to a decreased emphasis on preventing fraud in an organization.
Those factors may not directly cause a greater rate of fraud in small to midsized companies, but they can definitely make organizations more susceptible to being defrauded. In addition, the inherent lack of segregation of duties in some businesses means an individual may have the ability to perpetrate and conceal a fraudulent act more easily than in a larger organization that divides responsibilities and provides greater oversight.
Who's committing fraud?
The size of losses from fraud closely corresponds to the position of the perpetrator. According to the ACFE study, business owners and executives who committed fraud caused a median loss of $1 million. That is nearly five times the median loss managers caused and almost 13 times as large as the median loss employees generated.
The majority of occupational fraud incidents in the study involved either the accounting department or upper management. Employees in the accounting department committed more than 30 percent of the frauds, and upper managers or executive-level employees committed slightly more than 20 percent.
High-level executives who commit fraud are not immune from detection and punishment. High-profile corporate scandals in publicly held companies have emboldened federal, state and local prosecutors and given law-enforcement officials more far-reaching powers. Since the adoption of the Sarbanes-Oxley Act of 2002, the U.S. Department of Justice Corporate Fraud Task Force has secured more than 1,000 convictions or guilty pleas, including cases against more than 200 corporate chief executives, presidents and chief financial officers.
Tips to deter fraud
There are some easy steps to take in order to reduce the chance of fraud occurring within your business:
- Train employees on the detrimental aspects of fraud. Those who receive regular and recurring training are more likely to aid in controlling it.
- Adopt a tip hotline or complaint-reporting mechanism that will enable employees, vendors, customers or outside sources to report suspected fraud anonymously or without fear of reprisal.
- Separate the duties of receiving funds, disbursing funds, writing checks, signing checks and reconciling bank accounts. Having one employee responsible for all cash-related functions makes small businesses especially vulnerable to fraud.
- Have your monthly bank statement delivered unopened to the owner, who should review it for unusual transactions such as declining deposits and unfamiliar payees.
- Look for signatures or endorsements that look forged, missing checks, check numbers that are out of order and checks where the payee listed does not match the name in the check register.
- Consider an independent review of the cash accounts and bank statements by an anti-fraud specialist.
- Have an accounting software program expert, preferably a CPA, do the initial set-up of the program to make sure that helpful features are turned on and unhelpful features are turned off.
- Make your personnel and vendor master file records password protected and restricted by job function.
Ensure your computer systems create an audit trail of all changes made to the vendor master file records, including an identification of those who made the changes.
While small and midsized businesses are usually harder hit by fraud, remember that simple checks and balances, as well as owners' and management's staying involved in the financial aspect of the business, can help keep your business safe.
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