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New ACFE Fraud Study Yields Warning to Small Business
by: Cary Christian


The Association of Certified Fraud Examiners recently released their periodic study titled "2002 Report to the Nation: Occupational Fraud and Abuse."  It contains information that might surprise many small business owners.


When you mention occupational fraud and abuse, most people think of large companies.  It does seem logical that fraud would be easier to carry out and keep hidden when there are thousands of employees who daily are exposed to opportunities to abscond with corporate assets.  Actually, just the opposite is true.


The results of the study show that the average fraud scheme in a small business (1 to 99 employees) causes $127,500 in losses.  The average scheme in the largest companies (10,000+ employees) causes $97,000 in losses.  While these numbers are telling, the full impact of fraud on small business is much greater.  How much more would your small business miss $127,500 lost to fraud than a giant corporation with billions of dollars in assets losing $97,000?  The difference is not just $30,500; it might be the difference between survival and bankruptcy for the small business.


It can't happen to you, right?  That's just what every business owner thinks before it does.


Most small business owners believe they have their hand on the pulse of the business and that they know everything that is going on day-to-day.  When the business is very small, that is likely the case.  It is much more difficult for someone to commit fraud against you when there are only one or two employees.  But as your business grows, the environment becomes ripe for fraud.  The owner must hire more employees, let go of some responsibilities and delegate more authority. 


This pattern of growth continues and one day the owner wakes up and realizes he no longer knows everything that goes on day-to-day.  He or she is in a position of being forced to trust others with his or her livelihood.  More often than not, that trust is the only control within the organization against fraud.  Fraud has never been an issue before and owners are reluctant or too busy to realize that real financial controls are now needed.


The study also points out the average fraud scheme in the study lasted 18 months.  Time flies.  We know that.  A busy owner might easily ignore the need for tighter controls for months before taking action.  With each month that passes, a fraud may be continuing.  Corporate revenue, assets and reserves might be flying out the door while the owner considers whether or not controls are needed.


Just as growth must be managed to remain profitable, the installation of controls into your business must occur as growth occurs.  Otherwise, much of your growth might be enjoyed by someone other than yourself!


Most small businesses do not hire outside auditors to audit the business annually.  Even if they did, the discovery of fraud during a normal audit is not guaranteed.  Procedures directed toward detecting and controlling fraud must be specifically designed for that purpose and must be continual not annual.  An internal audit function will become necessary at some point in time.  You may not be there yet, but you will reach that point if you continue to grow.


So what do you do in the meantime?  The ACFE report outlines three MINIMUM procedures that are recommended for small businesses.  They are:


1.  Do not allow the same employee to keep books, collect funds, write checks and reconcile the bank account.  These are solid principles of internal control.  If the same person is responsible for these functions, they can commit fraud with virtually no chance of anyone uncovering it through a review of corporate records.  They will have the means to cover their trail by controlling all the checks and balances that apply to cash management.


2.  Have the monthly bank statement delivered unopened to you, the owner, and review it for unusual transactions such as declining deposits and unfamiliar payees.


3.  Consider having an annual independent review of the cash accounts and bank statements by an anti-fraud specialist.  I would add that you should consider having such a review done immediately if you see anything suspicious during your monthly review of the bank statements.


In addition to these three minimum procedures, you should consider creating an infrastructure for reporting of fraud by employees, vendors, customers, and others who interact with your business.  Set up an anonymous tip line for people to report fraud and advertise the number everywhere you can.  These frontline people, especially your employees, are in a better position than you are to observe fraud.  Such a program has the additional benefit of serving notice on those that commit fraud that someone may be watching and that you are taking fraud in the workplace very seriously.


If you would like to read the complete 2002 Report to the Nation: Occupational Fraud and Abuse, you can download it from the website of the Association of Certified Fraud Examiners at:


If you have any specific questions about fraud in the workplace and what you can do to prevent it, please send me an email.  I'll be glad to help.  Just send it to


Copyright 2003


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