Scope of Fraud and Its Impact on Small Businesses. What Owners Can Do to Prevent Fraud from Occurring in the First Place

Scope of Fraud and Its Impact on Small Businesses. What Owners Can Do to Prevent Fraud from Occurring in the First Place

Fraud is any intentional act or omission designed to deceive others, resulting in the victim suffering a loss and/or the perpetrator achieving a gain.(1) According to a poll by the Association of Certified Examiners on small businesses with less than 100 employees fraudulent activities ranged from employee theft of cash, equipment, merchandise, inventory, and even data. Fraud schemes ranged from such things as billing, check tampering, skimming, expense reimbursement, corruption, physical theft, cash larceny, fraudulent financial statements, and register disbursements.(2) As you can see there are many ways in which fraud can be committed within a business.

Fraud can hurt small businesses to a larger extent simply based on the fact that small businesses have much more to lose. They can’t afford the negative publicity of a corruption scandal because they may only have a couple of clients that do most of their business and if news spreads it may permanently scar the small business. Losing trust from clients is one sure way to not only lose their business but lose your credibility within your market. Larger companies can handle the downswings and micromanage fraud cases better perhaps.

One reason why small businesses are affected to a greater extent than larger businesses is because as a small business they don’t have the amount of systems in place to flag fraud. Many larger organizations have check and balance systems that allow people to overlook others work. In a corporate climate this ability to afford workers for oversight work is often a leisure of corporate business but small businesses are often running pretty tight and it is usually up to the owners to catch it.

There is however some tips and tricks to spot potential fraud. First you should know that fraud happens at all times whether the economy is good or bad. According to Chris Barr who has thirty-three years of experience as an operational risk underwriter in corporate insurance against internal fraud;

“Most frauds are perpetrated during economic booms, when greed reigns. Money is plentiful and it flows freely. These frauds are discovered when economic activity drops, revealing the previously obscured shortages. The frauds cited tended to commence two or three years before they blew up. And business owners seemed to cite closer scrutiny of cash flows as the cash dwindled. The distinction is often critical to the insurance. The crime loss occurrences that do tend to spike during recessions are, for the most part, sudden, smash and grab larcenies, either caused by insiders or outsiders. These tend to be discovered almost immediately. We insure them, too, but they are smaller and simpler.” (3)

With that being said as a small business owner you should constantly be alert and attentive to detail. There is also insurance you can take out in case it does happen. Five principles to live by are to institute a fraud risk management program with written policies in place to convey expectations. Fraud risk exposure should be assesses periodically by the business to identify potential schemes and events. Prevention techniques should be implemented to prevent such events in the first place. Detection techniques to uncover any such events if they do occur. And lastly, a reporting process in place to solicit input and a coordinated approach to investigation and corrective action to ensure that potential fraud is addressed appropriately and timely.(1) One suggestion if a you as a business owner does discover business fraud is to keep it quiet and build a team, ideally an accountant and a lawyer. You could lose the chance to recoup the lost money if you don’t approach them in just the right way at the right time.(3)

1. Managing the Business Risk of Fraud : A Practical Guide



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