Internal occupational fraud — schemes that involve employees who misappropriate assets, tamper with checks, skim cash or steal inventory — is a significant problem for businesses big and small. This week, the Association of Certified Fraud Examiners released its findings on the state of fraud in corporate America, and the numbers should concern anyone running a business.
The association’s biennial research, published in its 2018 Report to the Nations on Occupational Fraud and Abuse, looked at 2,690 cases of occupational fraud at organizations around the world. The average duration of these incidents occurred over 16 months and cost the businesses affected a whopping $7 billion.
According to the report, the most common forms of fraud include embezzlement, payroll fraud and reporting false expenses.
You might think that this is a mostly big company issue, but it turns out it’s the opposite.
While larger companies (those with more than 100 employees) suffered median losses of about $104,000, smaller businesses suffered more. Companies with fewer than 100 employees had an average median loss of $200,000 — almost double that of their larger counterparts, the research showed.
“Occupational fraud continues to siphon staggering amounts of money from businesses worldwide, with smaller organizations being hit particularly hard,” wrote Jeff Drew at the Journal of Accountancy.
The big question, of course, is why. The answer has to do with resources. Small businesses, like mine, have fewer resources than big corporations.
We have fewer internal controls. We have less time to supervise what our employees are doing. We have few, if any, mechanisms for reporting potential fraud, such as hotlines that people could use to leave anonymous tips. (Forty-four percent of frauds were detected this way, the report said.)
Being aware of certain behavioral red flags that the association identified is a start. Requiring vacations for all employees is a must, as is having a process for anonymously tipping off owners when an employee suspects a problem. Simple internal controls, such as counting and locking up inventory and performing regular bank reconciliations, is necessary. Bringing in your accountant once in a while to perform spot audits isn’t a bad idea, either.
Sure, it’s going to cost you. But the lesson for smaller companies is clear: Internal fraud hits us harder than it does larger companies, and we have to make investments if we want to minimize this exposure.