How to Protect Your Small Business Against Fraud

How to Protect Your Small Business Against Fraud – Shannon & Associates LLP Kent, WA

FRAUD… what no… not in my business!

This is what we hear all the time. Business owners hate to even think about it let alone invest in resources to prevent it because, well, it would never happen to them, right?

The statistics on fraud are frightening

The most recent “Fraud Report to the Nations” indicates that on average the typical organization loses 5% of their annual revenue to fraud. With a small $3 million dollar a year business that would equate to about $150,000 a year that the business would lose fraud, every single year. 

How fraud can happen to you

Let’s lay out a very common picture of how this can happen. Sally, an office manager at Joe’s Plumbing has been working in the office for the past 10 years. She and the owner have a high level of trust. She does a great job at keeping jobs scheduled, answering the phone, and keeping QuickBooks up to date. 

In fact, Sally rarely if ever takes a day off and works on evenings and weekends to make sure everything is being taken care of at the office. 

But soon Sally falls on hard times. Her husband loses his job and she begins to miss some of her personal bills.

On average the typical organization loses 5% of their annual revenue to fraud

One night while working late in the office, she decides to “borrow” some money from the daily deposit to cover her utility bill, so her power doesn’t get shut off.  Sally has every intent to pay this back and keeps track of the $250 she took.  

Two weeks go by and she realizes that no one ever noticed the money was missing.  Pretty soon this snowballs, and she realizes that she could also go into payroll and give herself a one-time bonus. She could just change the name on vendor checks after they were signed and either pay herself or her bills directly through the company. 

18 months goes by and the amounts begin to accumulate. A good friend of Sally’s and co-worker overhears a personal conversation that seemed suspicious. Although she feels bad and not sure what is going on she mentions it to the owner…..and this is how fraud happens in a small business.

Small businesses are vulnerable

The latest 2018 Fraud Report to the nations identified that the median loss for internal or occupational fraud (using one’s job for personal enrichment) was $200,000 per incident for businesses with less than 100 employees – that’s almost twice the amount for larger businesses. 

Why is that? Well, small businesses typically have less fraud prevention controls and place a lot of trust in key people. Fraud can be devastating to a small business, but they have fewer resources to prevent and/or recover from fraud. 

What I find very interesting is that overall 40% of frauds are detected via a tip. A tip can come in the form of a hotline or someone just expressing a concern, as in our example.  But, in small businesses with fewer than 100 employees only 29% of fraud is detected by a tip. 

As a small business owner, you need to ask the following: What can I be doing to foster a culture where receiving tips can happen. This could mean implementing an inexpensive ethics hotline or offering a training to employees on fraud risks.

Fraud can be devastating to a small business, but they have fewer resources to prevent and/or recover from fraud. 

In small businesses the cause of most occupational fraud (42%) is due to lack of internal controls, as compared to only 25% in large businesses. 

Some controls are very easy to implement and can have a big impact. Overall, you want to make sure that an entire process can not be completed by one person. 

A process includes…

  1. Initiating a transaction
  2. Approving a transaction
  3. Recording a transaction and
  4. Reconciling a transaction. 

If a business can extract just one of these items from a person, it creates a much stronger level of internal control. (And trust is not an internal control.)

These are just a few of the alarming statistics and any small business owner should take notice. The entire report is worth a read and you can find it here.

I am passionate about helping small businesses become educated about these risks. And as a result of this knowledge I hope that we can help bring these statistics down.

By Jessica Norris, CPA, CFE, CVA, Senior Manager

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