How to prevent fraud in your small business

Most small business owners don’t even consider that their employees might be stealing from them until it’s too late.

The average small business fraud lasts 24 months and costs $200,000 at the time it is discovered, according to the 2008 Report to the Nation from the Association of Certified Fraud Examiners (ACFE).

Three former employees of PBS&J, a Miami engineering firm, have pleaded guilty in federal court to their role in embezzling $36 million in a scheme that spanned more than 12 years. (According to a report in the Miami Herald on September 29, 2006).

The average American business loses 7% of revenue (sales) due to fraud, more than the total profits in many small businesses. There are five main causes of a higher incidence of fraud in small businesses.

1. Trust. Small business owners tend to be closer to their employees, knowing them personally and from a business standpoint. For an employee to steal from you, you must trust him. Employees tend to be more trustworthy in smaller companies.

. Small workforce. With a small number of employees, many business owners believe controls are impossible. That’s not true. Even with a small number of employees, some controls can be implemented. Even a small number of checks can reduce the likelihood of fraud. For example, the ACFE report indicates that companies with a mandatory vacation/employment rotation policy had 61% fewer fraud losses.

3. Lack of delegation. Small business owners tend to want to be in control. As a result, employees are hired, given a job, but the owner keeps important parts of the job for himself. As a result, there appear to be controls. Unfortunately, the owner has overloaded himself with too many tasks; and, as a result, they do a poor job of executing them. For example, signing checks without carefully reviewing the documentation.

4. Unclear and overlapping job responsibilities. In a small company, it often seems like everyone is responsible for everything. If work needs to be done, everyone is expected to pitch in. Unfortunately, this provides an opportunity for a dishonest person to get around the controls by being able to work in more than one part of the business.

5. Controls are not a priority. Finally, controls just don’t seem like a priority for most small business owners. There is a general attitude of “it can’t happen to me”. Unfortunately, it can happen to you! Spending some money now to install a series of preventive controls should be viewed as an investment (just like an insurance policy), not an expense. Like insurance, you hope you don’t need it, but if you do, the controls may be there to help.

A former Home Depot employee has pleaded guilty in federal court in New York to accepting millions of dollars in bribes from suppliers to ensure the company stocked its products. He shared more than $2.5 million in leftovers with other company employees in a scheme that spanned three years. (According to a Reuters report dated June 30, 2008).


1. Recognize the possibility that it could happen to you. Business fraud is widespread and most business owners don’t realize it until it’s too late.

2. Know the common indicators of fraud. There are many indicators of fraud. Business owners need to be aware of these red flags and be on the lookout for them. They do not always mean that fraud is taking place, but they do mean that further monitoring may be necessary.

3. Review and strengthen internal controls and take other anti-fraud measures. There are many measures that have proven effective in reducing fraud opportunities and providing deterrence. The business owner should be aware of the most common controls and other measures for their particular type of business.

4. As the business owner, take personal responsibility for ongoing monitoring. In a small business, the owner himself must accept responsibility for anti-fraud efforts and control. Trusting an employee with this critical task can be a huge mistake if that employee turns out to be a scammer. The ACFE Report also shows that the higher a person is in the organization and the longer he has worked there (ie, the more he is trusted), the more fraud he commits before he is discovered.

A 63-year-old man who worked as the Director of Financial Services for a nonprofit organization pleaded guilty in federal court to diverting more than $400,000 in incoming checks payable to the nonprofit to a fictitious bank account. (According to a report from the Washington Post on September 24, 2008.)

Where to get help

Internal audit. If you’re a larger company, your first line of defense should be your internal audit department. Public companies are required under Sarbanes-Oxley to have an internal audit report directly to a committee of the Board. But even if it’s not a public company, internal audit must report directly to the top. The department with the most incidents of fraud is accounting, so it generally doesn’t make sense to have internal audit within the accounting or finance functions.

company lawyer. It is important to actively involve company legal counsel in any anti-fraud programs or investigations of suspected fraud. If you are a larger company, this should be your corporate tip. If you are a smaller firm, you need trusted outside counsel with experience in this area to guide your preventive and reactive actions.

external CPA. Many CPAs have been trained and are experienced in reviewing controls and recommending improvements. This can be a stand-alone task or will be done as part of an audit. Remember that accounting controls focus only on the accounting system. Additional types of controls are needed in other areas to effectively reduce opportunities for fraud. It is important to understand that an accounting audit is not designed to find all fraud, nor is it likely to.

Certified Fraud Examiner (CFE). CFEs are specifically trained and experienced in the area of ​​fraud prevention and investigation. They may also have additional backgrounds in accounting, law enforcement, or other fields.

If you suspect fraud

When the owner (or manager) of a business suspects that an employee is stealing from the business; the most common reaction is emotional. He probably wants to call them into his office, confront them and fire him. In most cases, this reaction will only cause additional headaches and potential financial loss.

In general, it is best to keep your suspicions to yourself until after you have consulted with a qualified professional and legal counsel. There are many possible issues to consider before deciding on a course of action.

Even if the employee really did steal from you (and we usually don’t know for sure yet), the legal system gives you numerous rights. Get professional help right away so you don’t expose yourself to potential liability.


A hospital warehouse supervisor in Spokane, Washington, pleaded guilty in federal court to collecting more than $600,000 in his PayPal account by selling stolen hospital supplies on eBay. The fraud continued for more than three years. (According to a report from the seattle times on December 21, 2006.)

If you’re a business owner, the time to act is now, not after you’ve suffered a huge loss. Go back to the four steps in the prevention section of this article and start implementing them now.

Not sure how to do it? Proper professional assistance can be a wise investment.

As a final thought, remember that while checks can, in some cases, spot fraudsters; they cannot stop a determined thief. A strong and ongoing monitoring program is critical to detecting fraud earlier, before it becomes a major loss.

Good luck in your business and fraud prevention efforts!

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