Many Maine-based small business owners assume their companies are less susceptible to fraud than large corporations. It seems like their operations are more tightly controlled, with many trustworthy and longtime employees on the payroll.
Unfortunately, however, this is not true. According to the Association of Certified Fraud Examiners (ACFE) Report to the Nations on Occupational Fraud and Abuse, small businesses suffer disproportionate losses from internal theft.
This actually does make sense, as smaller companies are often unaudited, and with little or no anti-fraud measures.
Small Businesses Often Dealt a Crippling Blow
In the 2014 ACFE survey, it is estimated that the typical organization loses 5 percent of its revenues to fraud each year. When that is applied to the 2013 Gross World Product, this is equivalent to a potential projected annual fraud loss of more than $3.7 trillion.
Some other key points from the study:
- In the occupational fraud cases in the study, the median loss to companies was $145,000. 24 percent of the cases involved losses of at least $1 million.
- Small organizations were victimized by fraud more frequently than big companies, and their median loss was disproportionately larger, at $154,000.
- Before being detected, the frauds lasted a median of 18 months.
- The longer a perpetrator has worked for an organization, the higher fraud losses tended to be.
- The most common method of fraud within small businesses were billing schemes.
Three Reasons for Increased Vulnerability
Small businesses are more vulnerable to occupational fraud for three primary reasons:
- Smaller companies tend not to have annual financial audits, which are a staple for larger firms and can often uncover fraud. They also tend to not have internal controls in place, such as employee and manager fraud training and employee support programs.
- Smaller companies usually don’t have hotlines for employees, vendors, and customers to report observed instances of fraud. These have a significant impact on fraud detection, yet they are often not utilized.
- Small organizations don’t have sophisticated internal financial controls that are designed to prevent occupational fraud. This can mean employees handle many duties, and have an easier time covering up or destroying evidence that would reveal fraud.
In order to prevent fraud, Maine-based small business owners should primarily focus on finding ways to detect asset misappropriations and corruptions within their organizations. One way might be to implement measure designed to more accurately track cash. This will help reveal problems and help top potential cash leaks.
For more information, contact Filler & Associates.