Small Businesses Fraud

Data show that smaller businesses (less than 100 employees) are more vulnerable to fraud than larger ones (more than 100 employees).  According to a survey by the Association of Certified Fraud Examiners (ACFE) in their 2018 Report to the Nations, small businesses globally had a annual median loss to fraud of $200,000 while larger ones had a median loss of only $104,000. A small business may be more susceptible to fraud due to a lack of internal anti-fraud measures and controls—42% of frauds were caused by lack of controls vs. 25% in larger organizations. In addition, in smaller businesses 29% of the fraud was perpetrated by an owner or executive in comparison to 16% in larger business.[1]  The main cause is likely due to smaller businesses having a single individual in charge of many areas of the organization and often no one oversees that person.

The main kinds of fraud schemes seen in small businesses are:[2]

• Corruption
• Billing Scheme
• Check Tampering
• Expense Reimbursements
• Skimming

It is not just a lack of controls that lead to fraud in small businesses. Often, owners of these businesses often put too much trust in employees.

According to the ACFE report, 89% of such frauds involve first-time offenders.  When an employee experiences one or more factors of the fraud triangle—pressure, opportunity, and rationalization—the likelihood of fraud against the organization increases.

It is estimated that 60% of all fraud losses to small businesses are not recovered. Therefore, having a control system combined with trained employees can be the difference between success and ruin for a small business owner who may not be able to recover from a large fraud loss. Additionally, it may be best to hire experts to help draft a fraud deterrence plan if the smaller firm does not have its own resources.

The ACFE advises all organizations regardless of size, to combat fraud with preventative measures. The following are guidelines:

• Take a proactive step—create and maintain strong internal controls that help create a system of checks and balances.
• Create a hotline that employees can call to report potential violations or concerns.
• Train employees in fraud prevention.
• Have regular internal audits to find any violations and identify weaknesses.

[1] Association of Certified Fraud Examiners. (2018). Report to the Nations: 2018 Global Study on Occupational Fraud and Abuse (pp.20-23). Retrieved on October 30, 2018 from https://s3-us-west-2.amazonaws.com/acfepublic/2018-report-to-the-nations.pdf
[2] Ibid, 23.