Fraud Impacts Small Businesses – What You Should Know

June 19, 2017


Most executives are familiar with internal control procedures but some of the most informed leaders don’t necessarily have the right controls in place to protect their organizations.  The reasons usually come down to inexperience, trust, and the perceived cost of oversight.  Many don’t think they have the time or resources to design an internal control structure. Or they employ a trusted co-worker, friend, or family member to take care of the accounting for the organization. Many don’t realize the prevalence of fraud and the impact on businesses and organizations every year. The Association of Certified Fraud Examiners conducts surveys regularly and the statistics are alarming.

*ACFE found that organizations with less than 100 employees represent one third of all fraud cases, the largest share in the industry among businesses of any size.

*The median loss for all cases in the study was $150,000, with 23.2% of cases causing losses of $1 million or more.

*Check tampering, skimming, payroll, and cash larceny schemes were twice as common in small organizations as in larger organizations.

*Small organizations had a significantly lower implementation rate of anti-fraud controls than large organizations. This gap in fraud prevention and detection coverage left small organizations extremely susceptible to frauds that cause significant damage to their limited resources.

*The most prominent organizational weakness that contributed to the frauds in the study was a lack of internal controls, which was cited in 29.3% of cases, followed by an override of existing internal controls, which contributed to just over 20% of cases.

*Perpetrators of fraud tend to display behavioral warning signs when engaged in their crimes. The most common red flags are living beyond means, financial difficulties, unusually close association with a vendor or customer, excessive control issues, a general “wheeler-dealer” attitude involving unscrupulous behavior, and recent divorce or family problems. At least one of these red flags was exhibited during the fraud in 78.9% of cases in a 2016 study.

*Most occupational fraudsters are first-time offenders. Only 5.2% of perpetrators in this study had previously been convicted of a fraud-related offense, and only 8.3% had previously been fired by an employer for fraud-related conduct.

David Ingram from Chron identifies seven ways to help protect your organization:

1. Segregate Accounting Duties – Spread the responsibility for bookkeeping, deposits, reporting and auditing to different staff members. The further duties are separated, the less chance any single employee has of committing fraudulent acts. Have employees review each other’s work.
Access Controls – Control access to different parts of an accounting system via passwords. Lockouts and electronic access logs will keep unauthorized users out of the system. It also allows you to audit system usage and the identity of the source of errors or discrepancies. An organization that tracks system access will deter fraud.

2. Physical Audits – Count cash and monitor inventory both physically and in the accounting system.
Documentation – Standardize documents including invoices, material requests, receipts, and expense reports. Standardization can help identify financial discrepancies.

3. Trial Balances – Using a double-entry accounting system adds reliability by ensuring that the books are always balanced. Even so, it is still possible for errors to bring a double-entry system out of balance at any given time. Calculating daily or weekly trial balances can provide regular insight into the state of the system, allowing you to discover and investigate discrepancies as early as possible.

4. Reconciliations – Monthly accounting reconciliations can ensure that accounting system balances match up bank and credit card accounts. This practice can quickly identify a problem.

5. Approval Authorization – Requiring specific people to authorize certain types of transactions can add a layer of protection to accounting records. Bill.com is a platform that can be set up with multiple approvers before money can be disbursed, adding an additional layer of protection.

Every week we read about another instance of fraud. Don’t let your organization become a statistic. Contact mAccounting if you’d like to discuss how to protect your organization with better internal controls.