Small business (less than 100 employees) had the highest frequency of fraud and some of the largest losses per the most recent “Report to the Nation”, a study published by Association of Certified Fraud Examiners. More specifically, the median losses by small business (100 employees) were $154,000 while the largest of businesses lost $160,000 (10,000 employees). In addition, small business simply had more fraud with a 28.8% occurrence rate while large business maintained a 19.8% rate.
These statistics may look relatively close in dollars and percentage terms, but they don’t effectively portray the relative impact. While the median fraud is a mere $6,000 different, small business fraud occurs at an average rate of $1,540 per employee while large business sustained a $16 per employee effect (nearly a 100x multiple).
Given cash flow at small business is nowhere near what it is in a large organization, a misappropriation of this magnitude can be devastating, especially when the ACFE report noted 58% of victims had not recovered the loss and only 14% making a full recovery.
It comes to no surprise that small business is the most vulnerable to fraud. Small businesses have small accounting departments, with many relying on one person for all cash inflow and outflow functions.
This conflict of duties easily facilitates phony invoice fraud and check tampering, the top two frauds affecting a small business. While businesses can try to complete additional manual reviews or establish more rigorous internal controls, they may find they simply do not have the time or the business to support such endeavors. If they look to their CPA firms for assistance, the firm will remind them that firm procedures are not generally designed to detect fraud from misappropriation, even if the firm completes a full financial statement audit.
Fraud does not discriminate, regardless whether you are a large or small company. However the risk of fraud for a small business should be magnified in focus given the impacts can be 100x worse when it strikes the smaller organization. The answer is to be more proactive and utilize technology to automate the rote review tasks as explained in our next news item “Anti-Fraud Robotics – The Benefits of Proactive Reviews”.
Guest post by Richard B. Lanza, CPA, CFE, CGMA,