Many people think small businesses are less susceptible to fraud than large corporations. That might seem like a reasonable conclusion because these operations are usually tightly controlled with many trustworthy and loyal longtime employees on the payroll.
What is Occupational Fraud?
The Association of Certified Fraud Examiners defines occupational fraud as "the use of one's occupation for personal enrichment through the deliberate misuse or misapplication of the employing organization's resources or assets."
This can include misconduct by rank-and-file employees all the way up to top executives, and range from petty theft to sophisticated swindles.
Three Types of Misappropriation
Fraudulent disbursements are often accomplished with phony invoices, forged company checks, and even nonexistent employees on the payroll (with live fraudsters behind the scenes cashing the checks).
Skimming, which means stealing cash receipts before they are recorded on the company's books.
Cash larceny, which means stealing company cash after it has been recorded on the books.
But unfortunately, it's not true. According to the Association of Certified Fraud Examiners Report to the Nations on Occupational Fraud and Abuse, small companies suffer disproportionate losses from internal theft.
Upon reflection, maybe this makes some sense after all, because smaller organizations are often unaudited and have not installed appropriate anti-fraud measures.
Small Businesses Often Dealt a Crippling Blow
The 2018 ACFE study estimates that fraud losses amount to roughly $4 trillion at global organizations. Roughly 28% of the fraud incidents (by number) were committed in businesses having fewer than 100 employees.
Bottom Line: The cost of an occupational fraud episode for a small company can be much more likely to deal a crippling financial blow.
Three Reasons for Increased Vulnerability
Small businesses are more vulnerable to occupational fraud for three primary reasons:
No. 1. Smaller companies tend not to have annual financial audits, which are a staple for larger firms and can often uncover fraud. According to the Association of Certified Fraud Examiners, the median fraud loss experienced by companies that have internal controls in place is less than companies without controls. Anti-fraud controls include anonymous hotlines, surprise audits, fraud training for employees and managers, employee support programs and instituting job rotation/mandatory vacations.
No. 2. Unlike larger firms, many smaller companies don't have hotlines for employees, vendors, and customers to report observed instances of fraud. Anonymous reporting mechanisms, such as hotlines, have a significant impact on fraud detection, yet they are often not utilized. This may be a symptom of the higher level of trust that exists in smaller businesses. Unfortunately, that trust is too often violated.
No. 3. Small organizations don't have sophisticated internal financial controls that are designed to prevent occupational fraud (or at least make it very difficult). Too often, this means employees handle many duties, which makes it easier to cover or destroy the audit trail that would reveal fraud.
Focus on the Most Important Fraud Issues
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 skimming from cash receipts and stealing inventory.
- Corruption such as collecting kickbacks from suppliers, giving unwarranted discounts to friends and relatives, and selling sensitive information to competitors.
Based on the preceding facts, you might decide to implement measures designed to more accurately track cash. Focusing on the logistics of how cash enters and exits your business can reveal problems and allow you to stop potential cash leaks.
Contact your accounting firm if you've overlooked the possibility of occupational fraud in your business and want more information about installing anti-fraud systems. Your CPA firm can help implement measures that are specifically designed to confront the issues unique to your operation.