04/ 09/ 2008
by Nick P. Tootle, CPA
According to the 2006 Report to the Nation on Occupational Fraud and Abuse by the Association of Certified Fraud Examiners, "The median [fraud] loss suffered by organizations with fewer than 100 employees was $190,000 per scheme…higher than the median loss in even the largest organizations. Small businesses continue to suffer disproportionate fraud losses."
Statistics like these make hardworking small business owners wonder why they are suffering a greater risk of fraud than their larger competitors. Chances are, small business owners become victims because they don't think they are at risk. "I trust my employees," many business owners think. "We're so small, we're all friends," they say. "No one here would steal from me."
But the unfortunate truth is that any employee might yield to the temptation of stealing if the proper controls aren't in place. High medical bills, out-of-control student loans, rising mortgage rates or uncontrollable addictions are just a few of the problems that could push a trusted individual over the edge.
In fact, according to the ACFE study, factors that indicate a higher level of trust are directly correlated to the size of fraud. Older, better educated, long-term employees at higher levels may be more trusted—which means they have more opportunity to commit fraud. And in departments where more opportunity to dip into company finances exists, like the purchasing department, the median loss is dramatically higher.
One of the best ways to keep internal scams at bay is to be aware of the different types of fraud. Here are the three most common types of fraud to which you could be susceptible:
Misappropriation of assets. Cash is the most commonly stolen asset. Misappropriation of cash includes skimming (taking cash before it's recorded) or cash larceny (taking cash after it's recorded, but before it's deposited). Schemes involving the disbursement of cash include frauds related to billing, expense reimbursement, check tampering, payroll, wire transfers and register disbursements. Non-cash misappropriations involve inventory, information or securities.
Corruption. Employees may have conflicts of interest outside of economic or personal benefits, which are at odds with the interests of the business. They may offer or take bribes or illegal gratuities, perhaps in contract negotiations.
Financial statement fraud. Financial statement fraud is generally committed by management to make results look better, or to conceal another type of fraud.
Most business owners would agree that risking $190,000 in fraud loss is unacceptable. Yet small businesses often fail to put basic protective measures in place. Here are the top things you can do to lower the risk:
Do the accounting. Sure, you close your business' books at the year's end, but to protect your business all year, regularly commit time to accounting. Closing your books every month, even if it's just reconciling your bank statement, gives you a snapshot of your business' pocketbook. If you're the main revenue source, irregularities should be clear to you immediately. The big account you landed in November doesn't seem to be reflected on your bank statement? Investigate further.
Have a budget. Without a general sense of your recurring expenses and projected revenues, reviewing monthly statements might not be enough. At a minimum, you need a general understanding of what the expenses for a typical month should look like or, if your business is seasonal, what the typical expenses for March or October should be. Take a few hours and review the past several years to develop a sense of the patterns.
Review the bookkeeper's work. If your business is large enough to have a bookkeeper, review his or her work regularly—after all, a slight oversight can go a long way. One of the best things you can do is have the bank statement sent directly to your home address. Even if your review is cursory, the perception of surveillance can deter a potential fraud.
Set the tone of your workplace. The ethical environment you set in your workplace, by words and deeds, is the model your employees will follow.
The 2007 National Business Ethics Survey points out, "Ethics risk is most effectively reduced by an enterprise-wide cultural approach to ethics that…focuses on ethical leadership, supervisor reinforcement, peer commitment to ethics, and embedded ethical values…Companies that feature a strong enterprise-wide cultural approach to ethics reduce misconduct by three-fourths."
If your business started as a solo operation, pay particular attention to the culture that evolves as you grow. If you run personal expenses through the business, will your employees respect your expense reimbursement policies? If you're so focused on the bottom line that the only behavior you reward is sales success, your sales staff might develop special relationships with certain customers that could cost you in the end. The tone you set can be crucial to protecting your business from fraud risk.
To avoid becoming a victim, take some simple actions today.
Nick Tootle is an audit partner at Kaufman, Rossin & Co., one of the top accounting firms in the Southeast. He can be reached at ntootle@kaufmanrossin.com.
