Fraud risks, methods differ for small businesses

Year after year, the Association of Certified Fraud Examiners reports that small businesses, those with fewer than 100 employees, are victimized by fraud more often than larger companies. The association’s 2014 Report to the Nations states, “Small businesses are both disproportionately victimized by fraud and notably underprotected by anti-fraud controls, a combination that makes them significantly vulnerable to this threat.”

The association also says median losses for small businesses are at $154,000 per case reported, which isn’t much less than the $160,000 median loss for large entities (more than 10,000 employees). But when the losses are calculated as a percentage of revenue, their overall financial impact is much greater to small businesses.

Small businesses often have one employee who covers multiple job duties, to save money or because one job responsibility may not justify the expense of hiring a full-time person. This can invite trouble.

For example, in 2014 a former office manager for an electrical company in Oklahoma City was sentenced to 27 months in prison and required to pay back about $308,000 stolen through forgery and signing false tax returns. This office manager was responsible for paying the company’s bills, depositing checks into the company bank account, and maintaining the company’s books and records. As a trusted employee in a small company, the individual was given multiple job responsibilities and left alone without significant supervision, which created an opportunity for fraud.

Besides the disproportionate financial of effect fraud, small-business owners also face different sort of risk than their larger counterparts. The association says check tampering occurred in 22 percent of the small-business cases they reviewed compared with 7 percent of cases in larger companies. Also, payroll and cash schemes occurred twice as often in small businesses as larger organizations.

Armed with this information, small-business owners should consider implementing these anti-fraud controls:

Add an anonymous fraud hotline: Tips are by far the most common detection method, and employees account for almost half of the tips that uncovered the fraud cited in the association’s report. Make it easy for employees to report any red flags they might see.

Add additional employees. Put them in areas such as accounting, operations and sales – departments where fraud is most often committed.

Divide duties: Require a different person to issue and sign checks or require two signatures per check.

Implement surprise audits: Conduct them regularly if adding an additional employee is not a possibility.

Mandate vacation time for employees. Employees who are unwilling to skip a day of work may be hiding something.

According to the Small Business Administration, small businesses make up 99.7 percent of employers in the United States. Unfortunately, the many small businesses that contribute positively to Southern Nevada’s employment and economy are disproportionately at risk for losing money because of employee fraud.

Even with the above-listed internal controls listed in place, there is still a risk for fraud. If an organization suspects an employee is stealing, a professional certified fraud examiner can be hired to investigate the financial records to assess the loss and suggest ways to tighten internal controls to prevent a recurrence.

Michael L. Rosten, a CPA and certified fraud examiner, directs the forensic accounting and litigation services at Piercy Bowler Taylor &Kern, which includes fraud investigations. He can be reached at

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