America’s economy gets much of its strength from the performance of private companies and small businesses. Over 99 percent of America’s 28.7 million firms are small businesses and they provide over 49.2 percent of private-sector employment. They are without a doubt the foundation of this great country.

Small or privately held businesses usually operate with limited resources so any financial disruption can seriously undermine their viability. This is particularly true in the case of occupational fraud.

Occupational fraud is when an employee steals from their own company. This can be done through various schemes, including skimming cash, stealing inventory, selling credit card information, or tampering with checks. Such actions can be devastating to any business but are particularly hard on private companies and small businesses which are 42 percent more likely to have fraudulent activity compared to large corporations, government, and non-profits.

Many small business owners believe it can’t happen to them. They think they are immune to occupational fraud because they know and love all of their employees, or they only hire friends and family. Unfortunately, this is not supported by the facts.

Since 1996, the Association of Certified Fraud Examiners has issued an annual report about Occupational Fraud and Abuse. Their 2018 Report to the Nations, Global Study on Occupational Fraud and Abuse again reflected the message that has been consistent over the years. Small businesses are not only more likely to be the victim of occupational fraud, but the financial impact is far more devastating than that of larger companies.

In terms of actual dollars lost, the median loss for small organizations (those with fewer than 100 employees) was the same as those incurred by the largest organizations (those with more than 10,000 employees). Not only are the losses a greater percentage of a small business net worth, but they are rarely ever able to recover the losses so the net impact is substantially greater than that of a large corporation.

Why is Occupational Fraud Rampant in Small Businesses?

Small businesses are often reluctant to create the safeguards that are necessary to avoid being the victim of fraud. In part, it is because they feel they can trust their employees, they don’t understand the internal controls needed to prevent and detect it, or they think protecting themselves is too costly.

The reality is a small business cannot afford the risk of ignoring the stark reality. It can be some of your closest and most trusted employees taking advantage of that sense of trust. Fraud does not only come from that part-time employee but often is from a co-owner, family member, or the trusted person who controls the bank account.

What can be done to Prevent Fraud?

Here are a couple actions that can be taken to protect your business:

  1. Making employees aware of this begins with having an employee handbook that sets forth a code of conduct and how violations will be addressed. This needs to be reinforced to new hires as well as holding an anti-fraud training each year as part of an overall compliance program.

The 2018 Report to the Nations states that 2 percent of owners will only find occupational fraud 2 percent of the time compared to 53 percent of employees; therefore, it is so important to have employees as part of the detection program

Small businesses need to take the risk of occupational fraud seriously and let all their employees know that any breach no matter how small will result in immediate termination and all cases will be reported to the authorities for prosecution.

  1. Engage in third party audits of financial statements. This is a critical component to protecting your small business. Set the process in place to control and manage inventory and assets.

Barnes Wendling CPAs has been a partner to privately-held and small businesses since 1946. We have seen the damage when a trusting business owner neglects the need to add safeguards to protect themselves and their business. We have programs and strategies to provide you with the comfort in knowing your business is protected from occupational fraud.

Watch our Webinar

We would love to share with you what we have learned and how you can protect yourself and your business. Please watch our recorded webinar, Occupational Fraud: What You Don’t Know, Can Hurt You.  In this program you will learn:

  • How fraud is committed,
  • How it is detected,
  • Who commits it, and
  • How organizations can protect themselves.

Questions about fraud?