Impact of internal fraud on small businesses

Internal fraud is a big business problem. According to research published by the Association of Certified Fraud Examiners (ACFE), about 5 percent of revenue is lost each year to fraud (on average, an organization loses $140,000 a year). Looking at it from a global perspective, it is projected organizations could collectively lose $3.5 trillion due to fraudulent activity.

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Small businesses the biggest victims

Small business fraud often doesn’t receive the wide exposure other massive frauds, such as the Enrons and Worldcoms, receive. But it’s a real issue for small businesses and, a particularly serious one, since these companies are more vulnerable. Small businesses often do not have the resources or manpower to stay on top of potential fraud and/or place procedures in place to keep financial integrity. In a 2011 study released by Javelin Strategy & Research, it was concluded small business owners lost $8 billion to fraud that year; a percentage of this was credited to internal fraud.

Fast-forward a few years and in 2014, ACFE found small business loss to fraud was a median of $154,000 (median for all businesses was $145,000). For the smaller companies, that’s quite a hit and on average, the fraud isn’t detected for about 36 months (hat tip Patriot Software).

Who are the fraudsters?

Fraudsters come in all forms, but unfortunately, it’s often the ones you least expect. Did you know, the primary perpetrators of fraud is committed by someone internal to the organization? It’s true, it’s sometimes the most trusted employees that are the ones behind the crime. Small businesses clearly have less staff than their larger counterparts, but the impact if fraud does occur is more severe.

How to prevent fraud

In the past banks typically absorbed most of the costs, but due to changes in the law, organizations are expected to exercise “ordinary care” to prevent financial loss. Fault may fall onto any party in a position to avert fraud. In order for preventatives to be established, it is important to understand and identify any potential weaknesses in the organization.

• Evaluate what weaknesses might exist
• Does the company have checks and balances in place?
• Are internal audits being done?
• Is the business adequately segregating duties? If one person(s) conducts both spending and approvals, this opens the floodgates for fraud. Ideally, separate departments should handle parts of the process or, at the very least, different employees.
• What technology is being used?

Considering fraud causes one-third of corporate bankruptcy, it’s clear it’s a big problem for all organizations, big and small. Fraud is also not just an isolated incident for a singular victim. In the end, it has a ripple effect when all is said and done. For those businesses that do survive data breaches and other types of fraud, these expenses end up driving up costs for everyone.