Is your small business vulnerable to fraud?
You might want to think about this before quickly dismissing the idea. During my career I have witnessed two businesses; one small and one mid-size that were victims of fraud. In one company a trusted executive assistant used the company credit cad to pay for more than $60,000 of personal expenses over a two-year period. The other was a payroll employee who set up ghost employees and had their payroll deposited into his account. He ran off with $80,000 over a six-month period. In both cases no funds were ever recovered.
The Association of Certified Fraud Examiners (ACFE) in their 2018 Report to the Nations estimates 5% of annual revenues are lost to fraud and this includes businesses of all sizes. In a benchmarking report by the ACFE, 38% of the members surveyed believe occupational fraud is getting worse and nearly half feel their businesses are more vulnerable.
Occupational fraud is described as fraud committed against an organization by its own officers, directors or employees. There are three categories of occupational fraud; asset misappropriation, corruption and financial statement fraud. For small businesses (under 100 employees) occupational fraud poses a huge challenge as most of these businesses lack the resources for fraud prevention.
In the ACFE Report to the Nations 28% of occupational fraud was committed against small businesses. They also found the median loss in a small business was $200,000 nearly double that of larger businesses which had a median loss of $104,000. 89% of the cases surveyed were for asset misappropriation.
Asset misappropriation can be theft of cash or inventory. Theft of cash occurs by someone skimming cash receipts or making fraudulent disbursements. This includes paying ghost employees or vendors, reimbursement of fake expenses and check or payment tampering.
The ACFE uses the fraud triangle as a basis for understanding what led to a fraud occurring. If all three elements are present this creates an environment for a person or persons to commit fraud.
The three elements of the fraud triangle are:
1.) Financial pressure – the perpetrator has unusual financial demand such as; a large or ongoing medical expense, gambling debts, etc.
2.) Rationalization – They believe they are owed the money or they may intend on repaying the funds.
3.) Opportunity – They have access to the funds due to poor internal controls or as a trusted employee.
In the two cases I was involved in I believe the biggest contributing factor was the lack of internal controls.
Although I agree small businesses struggle more with segregation of duties. I do believe there are ways to prevent or mitigate the possibility of fraud happening in your business. What steps have you taken to prevent fraud in your business?