Fraud Hits Small Businesses Particularly Hard

October 10, 2014

Small businesses have a tough time when it comes to fraud.

• They are victimized more often than larger organizations.
• Their losses are disproportionally larger than those of bigger companies.
• They can’t afford as many anti-fraud measures.
• A major fraud can virtually wipe them out.

Nearly one-third of all employment fraud cases took place in an organization with 100 or fewer employees, according to the latest biannual study of 1,400 cases by the Association of Certified Fraud Examiners.

That compares to 19 percent for companies with 100-999 employees, 28 percent for businesses with 1,000 to 9,999 employees and 20 percent for companies with 10,000-plus employees.fm0414b 2

The median amount of loss for small businesses in the study was $147,000, considerably more than for companies with 1,000 to 9,999 employees ($100,000) or those with more than 10,000 workers ($140,000). Companies with 100-999 employees had a median loss of $150,000.

Smaller businesses were hit most often by billing schemes (32 percent), while corruption was the primary fraud perpetrated against larger companies, according to the fraud examiners study.

Nearly 35 percent of larger businesses were the victims of a corruption scam, while 22 percent were victimized by billing schemes.

Small businesses also suffered from corruption cases (28 percent of cases), but they had three times as many check tampering cases and nearly twice as many skimming losses as larger businesses. A big part of the reason small businesses suffer bigger losses is because they have fewer anti-fraud controls in place.

Employee tips are, by far, the No. 1 way fraud is detected. Yet fewer than 20 percent of small businesses have a tip hotline in place, compared to nearly 70 percent of larger companies.

Some anti-fraud controls – such as internal audits and in-house fraud examination departments – require more resources than many small or medium-sized businesses can afford to initiate.

But many effective anti-fraud controls are low-cost and easy to implement, including:

• Communicating a code of conduct to employees
• Instituting anti-fraud training programs for employees and managers
• Requiring job rotation and mandatory vacations
• Conducting management reviews

In fact, requiring job rotation and mandatory vacations is the most effective way of all anti-fraud controls to reduce the duration of fraud (62 percent ), the fraud study found.

Only 8 percent of the small companies that were victims of fraud in the study required job rotation and mandatory vacations – allowing other employees to temporarily fill positions.

Among larger organizations, only 20 percent required job rotation and mandatory vacations, the lowest of any anti-fraud deterrent other than giving rewards to whistleblowers.

Ironically, giving a reward to whistleblowers was the second most effective means of reducing the duration of fraud (59 percent). Only 4 percent of small organizations and 11 percent of larger ones gave rewards for whistleblowers.