Small businesses have it rough. Small businesses are particularly vulnerable to fraud because they lack the resources to implement complete systems of internal controls and properly segregate accounting duties among their limited staffs. Therefore, accounting personnel may be tasked with completely inappropriate job functions that provide easy opportunities for committing financial frauds. Furthermore, the business cultures of small businesses are developed around a concept of a "trusted family" of employees. Consequently, placing trusted employees in positions without proper internal controls doesn't appear to be an unreasonable decision to managers of a "family" business.
However, small businesses don't have to be rife with fraud. Read more to educate yourself to better run your small business and avoid occupational fraud.
According to ACFE (Association of Certified Fraud Examiners) it is estimated the median losses for small organizations — those with fewer than 100 employees — that experienced a fraud were $147,000. The report indicated that small organizations are the most common victims in fraud instances at 31.8 percent — the highest rate of any business size category. (For example, organizations with 100 to 999 employees had a fraud incident frequency of 19.5 percent; 1,000 to 9,999, 28.1 percent; and 10,000 plus, 20.6 percent.)
The five most common fraud schemes for organizations with fewer than 100 employees in the ACFE report were: billing fraud, corruption, check tampering, skimming and expense reimbursement fraud. Corruption schemes deal with crimes such as bribery, illegal gratuities and kickback arrangements. The largest number of perpetrators in the entire study, 41.5 percent, had been with the organization between one and five years, most of them had a college degree and worked in the accounting area.
Even using ACFE survey data, it's difficult to estimate the true losses from employee frauds. Small businesses often don't report these crimes because of families' embarrassment, decisions not to file criminal charges or wanting to keep knowledge of the crimes privy. Only a small number of small business embezzlement victims — roughly two percent — report crimes even though 40 percent of small businesses report they have been victimized, according to the September, 2017, article on CNBC, "Workplace crime is costing US Businesses billions” by Elaine Pofeldt, special to CNBC.com
THE TRUSTED EMPLOYEE
Employee thieves normally don't fit the stereotypical career criminal profile. They often are in good standing, have worked with a company on average of four to five years and nine out of 10 of them are first-time offenders, according to the May 2017 article, "Why Embezzlement Most Often Occurs at Small Businesses," by Ken Springer in Entrepreneur.
Approximately 89 percent of the occupational fraudsters studied in the ACFE's 2018 Report to the Nations had never been charged or convicted of a fraud-related offense, and 69 percent had never been punished or terminated by an employer for fraud-related conduct. Consequently, the most trusted employee — who has easy access to funds and has never stolen anything — may yield to the overwhelming temptation to take company resources when he or she is faced with personal financial stress. Donald R. Cressey's well-known fraud triangle highlights factors such as personal stress (what he called "perceived non-shareable financial need" or pressure) that contribute to the implementation of a fraud scheme. (He said the other two points of the triangle are perceived opportunity and rationalization.
The motives for committing a financial fraud include greed, financial pressures or employee disenfranchisement. Disenfranchised employees become resentful after spending years handling mundane details for their employers without recognition, according to "Motivators to Commit Fraud," by Tracy Coene in the All Business Blog. They feel a need.
Other employees are motivated because they believe they're entitled to more financial compensation. They also rationalize they'll only "temporarily" borrow the money, and they'll return it later. Motive, rationalization and opportunity work in combination to increase the potential for employee fraud in any organization.
In many small businesses, the major reason fraudsters can commit their crimes is because management trusts them so much; they're family members or longtime friends, or they have proven work records and years of service, according to "The Trust Factor," by George A. Cassola in the Managerial Auditing Journal, volume 8, 1993, issue 7. That high trust level enables fraudsters to hide their activities. Even when business owners find suspicious behavior, they often believe it's inconceivable that employees would violate these trusted relationships. So, consequently, they hesitate to investigate, which results in much larger frauds.
Although the complete elimination of the occupational fraud risk to your organization is not possible, you can take tangible steps to mitigate the risks.
Much like keeping yourself healthy through diet and exercise, it’s much more cost effective to be proactive in managing your organization’s financial health rather than suffering what could be a significant financial loss plus all the negative ramifications which follow.
Contact professionals if you suspect fraud in your business or contact us if you would like to further discuss what Business Solutions by Design can do for you.
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