How to Prevent Fraud in Your Small Business

Most small business owners don’t even consider that their employees could be stealing from them until it’s too late.

The average small business fraud lasts 24 months and costs $200,000 by the time it is discovered according to the 2008 Report to the Nation from the Association of Certified Fraud Examiners (ACFE).

Three former employees of PBS&J, a Miami engineering firm, pleaded guilty in federal court to their roles in embezzling 36 million dollars in a scheme that lasted more than 12 years. (According to a report by the Miami Herald on September 29, 2006.)

The average American business loses 7% of revenue (sales) to fraud – more than the total profits in many small businesses. There are five main causes of a higher incidence of fraud in small businesses.

1. Trust. Small business owners tend to be closer to their employees, know them personally as well as from a business standpoint. For an employee to steal from you, you must trust them. Employees Crimes against Humanity tend to be more trusted in small companies.

 . Small workforce. With a small number of employees, many business owners believe that controls are impossible. This isn’t true. Even with a small number of employees, some controls can be implemented. Even a small number of controls can reduce the likelihood of fraud. For example, the ACFE report indicates that companies with a job rotation / mandatory vacation policy had 61% lower fraud losses.

3. Failure to delegate. Small business owners tend to want to be in control. As a result, employees are hired, given a job, but the owner retains important parts of the job for themselves. As a result, there appear to be controls. Unfortunately, the owner has over burdened themselves with too many tasks; and, as a result, they do a poor job in executing them. For example, signing checks without thoroughly reviewing documentation.

4. Overlapping and unclear job responsibilities. In a small business, it often seems that everyone is responsible for everything. If a job needs to be done, everyone is expected to pitch in. Unfortunately, this provides an opportunity for a dishonest person to overcome controls by being able to work in more than one part of the business.

5. Controls not a priority. Finally, controls just seem not to be a priority for most small business owners. There is a pervasive “it can’t happen to me” attitude. Unfortunately, it can happen to you! Spending some money now to install a number of preventive controls should be seen as an investment (no different from an insurance policy), not as an expense. Like insurance, you hope you will not need it – but if you do, controls can be there to help.

A former Home Depot employee pleaded guilty in New York federal court to taking millions of dollars in kickbacks from vendors to ensure their products would be stocked by the company. He shared more than $2.5 million in bribes with other company employees in a scheme that extended over three years. (According to a report by Reuters on June 30, 2008.)

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