Is Small Business Safe from Fraud?

Demystifying Valuation, Economic Damages + Forensic Accounting

Many small business owners have a feeling of invincibility when it comes to employee fraud.  Their “dedicated” and “loyal” employees would never steal from them.  Or maybe they are just too small to make any theft worthwhile.  The Association of Certified Fraud Examiners (ACFE) thinks otherwise and has the statistics to back it up.

Recently the ACFE released its 2012 Report to the Nation on Occupational Fraud and Abuse.  This bi-annual report surveys Certified Fraud Examiners (CFE) from around the world to learn more about the costs associated with fraud within all types of organizations.  The survey also looks at the methodologies used by the perpetrators as well as facts about the perpetrators.  The 2012 Report was compiled from nearly 1,400 cases of fraud from almost 100 countries around the world.  The victim companies ranged in size from less than 100 employees to over 10,000 employees.  Many interesting facts regarding fraud in small businesses (less than 100 employees) are included in the report and highlighted below.

  • Nearly one –third of the cases reported involved small businesses
  • Organizations with 100 – 999 employees accounted for another 20 percent
  • The median loss suffered by all size organizations was $140,000
  • The median loss suffered by small business was $147,000.
  • Billing schemes were the most common method of fraud in small businesses
  • Check tampering occurred in 20 percent of the cases in small businesses while only occurring in 7 percent of cases involving businesses with greater than 100 employees
  • Lack of internal controls was cited as the primary weakness contributing to fraud in almost half of the cases that occurred in small businesses
  • Across all size organizations, perpetrators displayed at least one red flag in 81 percent of the cases.  Red flags include:
  1. Living beyond your means
  2. Financial difficulties
  3. Unusually close association with vendors or customers
  4. Displaying excessive control issues.

Small business owners can’t keep their heads in the sand.   Cost effective anti-fraud measures can be implemented.  Examples include an organization code of conduct, anti-fraud training programs for employees that educate them on the red flags and types of frauds, formal management review of controls and processes.  Owners and managers also need to set a proper ethical tone for the organization.  Small business owners should not let their employees use them as a rationalization. 

Proactive measures to assist in preventing fraud are crucial and ongoing.  Management should be continually assessing its risk of fraud and its prevention programs.

Small business owners shouldn’t think they are invincible, it could cost them.

The complete 2012 Report to the Nation can be found on the Associated of Certified Fraud Examiner’s website at

Melissa Loughlin-Sines, CPA, CVA, CFE