Small Business Fraud

Fraud: A Small Business Survival Guide

Financial fraud is a big problem for small businesses. Small companies tend to lose almost twice as much money from each occurrence of fraud, compared to comparable incidents at medium-sized and large corporations, according to a recent global study from the Association of Certified Fraud Examiners. Small businesses represented in the study with fewer than 100 employees sustained average fraud-related losses of $200,000 per incident, compared to median losses of $104,000 at larger organizations.

Small businesses are vulnerable to payroll fraud, cash theft, false invoicing and online crime. A six-figure loss from any of these schemes can be enough to break a small business. Recovering from an internal fraud can be a long and stressful process, but with the right approach – and the right assistance – business owners can bounce back successfully while taking steps to ensure the fraudsters are identified and held accountable.

Online Criminals Target Small Businesses

Cybercrime – often committed by organized crime groups in foreign countries – has increasingly emerged as a serious threat to small companies. Perpetrators may present themselves as legitimate suppliers and request a change in payment arrangements, directing funds to a foreign or offshore account under their control.

Small companies that participate in global markets and supply chains are accustomed to sending funds overseas, so such requests might not seem unusual, at first – and therefore fail to attract the proper level of skepticism and scrutiny. Moreover, owners and employees of small businesses who are accustomed to dealing with familiar clients and long-term vendors are particularly susceptible to online attacks that exploit their sense of personal trust and established relationships.

Compensating for a Lack of Internal Controls

Due to their size, small businesses have fewer resources to prevent, detect and recover from fraud schemes on their own. Their bookkeepers and administrators are unlikely to be familiar with the anti-fraud procedures utilized by accounting departments in large corporate environments. A lack of internal controls was blamed for nearly half (42%) of all frauds sustained by small businesses in the ACFE study.

Stretching duties across a smaller workforce can also create opportunities for fraud, particularly when financial responsibilities are not segregated between different employees. An employee with combined authority to approve – and pay – vendor invoices can perpetrate a false billing scheme by creating a shell company and submitting fictitious invoices for services that were never provided. Separating duties is considered a key component in fraud prevention, but small business owners might not be able to hire additional employees to split responsibilities across accounts payable, accounts receivable and general bookkeeping. In such situations, forcing employees to take vacations and time-off can be an effective countermeasure, increasing the chances that a fraudster’s transactions will be caught in their absence. Cross-training employees and gradually shifting their control to different accounting functions can also be effective in ensuring internal frauds are not allowed to continue undetected indefinitely.

What to Expect from a Fraud Investigation

An investigation of suspected fraud at small and medium-sized businesses (SMBs) often begins by collecting and analyzing all relevant information pertaining to the scheme to confirm whether there is material evidence of actual fraud, such as embezzlement, fictitious invoices or cash skimming.

Once suspicions of potential fraud are confirmed, then the investigation will focus on positively identifying the perpetrators and obtaining proof of their involvement.

The initial stages of the fraud investigation can involve financial analysis and due diligence, plus discreet interviews and investigation of employees, officers, vendors or customers.

The results of the fraud examination will be summarized in a final report with supporting documents. These materials – backed by testimony of the investigators – are generally used to support civil litigation and coordination with law enforcement for criminal prosecution.

The final stage of the investigation consists of efforts to trace misappropriated assets to facilitate financial restitution and post-judgment collection efforts.

About the Author

John Powers is president of Hudson Intelligence, a private investigation agency specializing in the investigation of corporate fraud and financial crimes.

Contact an Investigator

Small businesses face unique risks in today’s business environment. Business owners who believe their firm has been victimized in a fraud scheme need an investigator who understands those risks – and knows the most effective approach to fraud detection and financial recovery.

To discuss a possible investigation with a certified fraud examiner, please complete the form below or contact the offices of Hudson Intelligence at 800-580-8755.

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Photo Credit: Closing Time by Chris McClanahan. CC BY 2.0