When it Comes to Fraud, There’s More Than Enough to Go Around
By Dawit Negari, CPA, CFE
Many people think small, private businesses are less susceptible to fraud than larger 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) 2014 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 agencies and nonprofit organizations.
Upon reflection, maybe this makes some sense after all because many 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 29 percent of the fraud incidents in the study were committed in businesses having fewer than 100 employees.
The news gets worse. According to the ACFE’s 2014 Global Fraud Study Report, the median small business fraud loss was a hefty $154,000. This is compared to median losses of nearly $160,000 for the larger entities. Though the absolute median loss for the largest entities is higher than that for small businesses, the overall impact of a $154,000 loss for many small businesses is much greater than the relative impact of a $160,000 loss on the much larger organizations.
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 companies have been left bankrupt in the aftermath of fraud schemes.
Smaller 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 do not 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 fraudulent cash disbursements, theft of cash on- hand and 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.
Lack of adequate financial and human resources makes small businesses more vulnerable to fraud. However, small businesses can enhance their ability to protect their resources from fraud by implementing relatively inexpensive anti-fraud policies and procedures such as a code of conduct, an anti-fraud policy, management review procedures, and anti-fraud training programs tailored to their organizations size and complexity.
Working with a qualified CPA or Certified Fraud Examiner (CFE) to implement sound internal controls and fraud prevention techniques is often the first step to preventing fraud in your organization.
Dawit Negari, CPA, CFE is a manager at Rubino & Company. In addition to his responsibility for developing audit plans and training of staff, he assists clients with internal controls, suggesting cost-beneficial solutions to their needs in order to enhance compliance with grant and regulatory compliance requirements and improve overall financial reporting capabilities. He is a Certified Public Accountant and Certified Fraud Examiner.