Small Business fraud

According to the Article published by a Linkend group member, Terry Corbell, "Small companies are fleeced by an aggregate $2.9 trillion from employee fraud -- suggesting the need for financial controls".  (Research done by the Association of Certified Fraud Examiners or ACFE.)

ACFE research showed:

• The median loss is $150,000, or 5 percent of the annual revenue.
• Twenty-five percent of the persons responsible for the fraud had been trusted employees-at least 10 years in the company.
• Thirthy percent of the companies have 100 or fewer workers.
• It took the company about a year and a half before discovering the shortages.
• More than 85 percent of the perpetrators didn’t have records of ever committing fraud.

Some considerations that could explain the findings are: 

• Some long-time employees seem to have a sense of entitlement when working at small companies that probably pay less than large firms.
• Small companies are probably more trusting of workers and are likely less sophisticated in financial controls while being focused on marketing for survival.

 What can you do to mitigate these findings:  

• These findings suggests the need for the implementation of sound financial internal controls on the day to day operations.
• The need for some insurance protection against losses.  
• The need of a thrird-party professional to review your finances, and internal control structure.
• Cooperation between your insurance company and your accountant to explain/understand your risk and controls so you can better be protected at a reasonable cost. 

Opinion- Personal in Nature:

These findings are alarming considering that for a small business with total sales of $500,000 could be at risk of lossing thousand of dollars in a given year (i.e., 5 percent of total Revenues) from fraud perpetrators.  

I recognize that most small businesses cannot afford a full-time CPA in their organization, but they could afford to engage for few weeks a professional with strong credentials (i.e., CPA, CFE, or CIA) for a fraction of a cost of a full time employee.  This professional could come to your business at least once a year and look out your weakenesses and recommend improvements in your internal controls to help you prevent and mitigate away from these alarming events.  The cost of hiring a CPA outweight many times over your potential losses.  

Definitions:
CPA= Certified Public Accountant
CIA=Certified Internal Auditor
CFE=Certified Fraud Examiner

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