Why Do Small Businesses Suffer the Biggest Fraud Losses?

by CP Morey on December 3, 2010
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The Association of Certified Fraud Examiners (ACFE) recently published the 2010 Global Fraud Report.  In it, this stunning revelation is offered: Businesses lose an estimated 5 percent of their revenues to fraud.

ACFE claims that companies with less than 100 employees represent a third of all fraud cases, the largest share in the industry among businesses of any size. The research also shows that small businesses suffer higher median losses than any size company, at nearly $150,000 per occurrence in the U.S.

Why do small businesses suffer more than their large counterparts?  It really comes down to three factors:

1) Inexperience — Most small business owners know their craft: plumbing, cake making, welding, wedding planning… but not accounting.  So they hire someone to help.  In the best case, the bookkeeper is trustworthy and knowledgeable, the owner gets a clean set of books, assets are protected, and everyone is happy.  In far too many cases, the bookkeeper has devious plans and knows exactly how to cover his tracks.  This is why organizations like the ACFE claim that, on average, a small business owner learns about fraud 18 months after it starts and is generally tipped off by someone outside of the company.  To put it in simple terms, their lack of experience makes them easy targets.

2) Too Much Optimism — Have you ever met a successful small business owner who wasn’t an optimist?  One of the most common things said after a fraud is uncovered goes like this: “I can’t believe she stole from us.  She was like one of the family.”  Most successful small business owners have such a positive outlook and are so genuinely excited about what they are doing that they cannot recognize when someone inside their circle of trust has evil intentions.  Their optimism can affect their ability to see the telltale signs of criminal activity.

3) The Cost of Oversight — In our current economic environment some like to say that cost cutting is back in style.  The fact is, with small businesses, it never went out of style.  While large companies safeguard assets with sophisticated internal controls, small companies often view even basic checks and balances as a drain on valuable resources.  Even simple controls like separation of duties just aren’t possible when the bookkeeper is also the receiving clerk and office manager. Pennywise thinking like this can lead to costly mistakes.

As a business owner, what can you do to prevent fraud?   Train your employees in fraud detection, and make it clear that integrity is expected. Put checks and balances in place, like separating check writing and signing. Develop an anonymous way for employees to report suspected fraud (three times as many cases are caught by a tip than any other method.) And, make it a habit to periodically review your accounts to identify problems before you’re taken to the cleaners.

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