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
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
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