According to a report released by the Association of Certified Fraud Examiners (ACFE), U.S. organizations lose an estimated 7% of their annual revenues to fraud – but the damage is the worst among small businesses. Among the fraud cases detailed for the report, the average loss suffered by organizations with fewer than 100 employees was $200,000. This was higher than the average loss for any other category.
The report also found that:
- Fraud schemes tend to be extremely costly. The average loss caused by the occupational fraud in this study was $175,000. More than 25% of the fraud involved losses of at least $1 million.
- Schemes frequently continue for years before they are detected. The typical fraud in our study lasted two years from the time it began until the time it was caught by the victim organization.
- Fraud was most often committed by the accounting department or upper management, and most fraudsters were first-time offenders. Only 7% of fraud perpetrators in the study had prior convictions and only 12% had been previously terminated by an employer for fraud-related conduct.
- Occupational frauds are much more likely to be detected by a tip than by audits, controls or other means.
- Small businesses are especially vulnerable to occupational fraud.
- 78% of victim organizations modified their anti-fraud controls after discovering that they had been defrauded.
Prather Kalman, PC is committed to helping our clients prevent and detect fraud. Fraud continues to be a serious problem for businesses and organizations worldwide. There are some simple steps a small business can take to identify and effectively manage potentially costly fraud losses:
1. Be proactive.
Establish and maintain internal controls specifically designed to prevent and detect fraud. Adopt a code of ethics for management and employees. Set a tone at the top that the company will not tolerate any unethical behavior.
2. Establish hiring procedures.
Every company, regardless of size, can benefit from formal employment guidelines. When hiring staff; conduct thorough background investigations. Check educational, credit and employment history, as well as references. After hiring, incorporate evaluation of the employee's compliance with company ethics and anti-fraud programs into regular performance reviews.
3. Train employees in fraud prevention.
Once carefully-screened employees are on the job, they should be trained in fraud prevention. Are employees aware of procedures for reporting suspicious activity by customers or co-workers? Do workers know the warning signs of fraud? Ensure that all staff knows at least some basic fraud prevention techniques.
4. Conduct regular internal audits.
High risk areas, such as financial or inventory departments, are obvious targets for routine internal audits. Surprise audits of those and all parts of the business are crucial.
5. Call in an expert.
For most firms, fraud examination is not a core business component. That's why, when fraud is suspected or discovered, it is imperative to enlist the anti-fraud expertise of a Certified Fraud Examiner (CFE).
Prather Kalman’s fraud and forensic experts are ready to help you prevent fraud before it happens and detect fraud when it is suspected. Contact us to have our Certified Fraud Examiner (CFE) and Certified in Financial Forensics (CFF) professionals assist you.