Not At Risk for Fraud? Think Again!

"I trust my employees."

"I have complete faith in my bookkeeper."

"(Insert name here) would never steal from my business!"

"I don't need to worry about fraud.  I have great employees!"

Did you know that the employee who appears to be the most dedicated and loyal is often the one who steals from you?  Consistently working long hours, taking work home, and never wanting to take vacations can also be signs of an employee trying to cover fraudulent acts.

According to a 2016 survey by the Association of Certified Fraud Examiners, the vast majority of fraud cases are perpetrated by first time offenders. "Only 5.2% of perpetrators in this study had previously been convicted of a fraud-related offense, and only 8.3% had previously been fired by an employer for fraud-related conduct." What does this mean for you and your business? Be vigilant! Never (ever, ever, ever) put your faith in one employee to handle 100% of your financial transactions. It's great to trust in your employees, but always check their work and observe their behavior. Know your employees well. The ACFE states that in 78.9% of fraud cases, at least one behavioral red flag is raised.  These behavioral warnings include "living beyond means, financial difficulties, unusually close association with a vendor or customer, excessive control issues, a general “wheeler-dealer” attitude involving unscrupulous behavior, and recent divorce or family problems."

Fraud is a serious crime with serious financial consequences, especially for small businesses. The ACFE goes on to state, "The median loss suffered by small organizations (those with fewer than 100 employees) was the same as that incurred by the largest organizations (those with more than 10,000 employees). However, this type of loss is likely to have a much greater impact on smaller organizations." This is because small businesses usually have fewer internal controls and fraud prevention measures. It can take much longer for smaller businesses to detect fraudulent activities. While a larger organization might be able to absorb a financial hit due to fraud and embezzlement, a small business can be devastated due to its lack of resources (in comparison to the resources available to large organizations). It is imperative to institute internal controls and perhaps even pay for external audits to ensure that your business is protected. When controls are in place, fraud is detected 33.3%-50% more quickly and financial losses are decreased by 14.3%-54%.

Overall, the typical business (large or small) loses 5% of its revenue to fraud.  This equated to over $6.3 billion in losses for all businesses that were included in the 2016 ACFE study. The study showed that the median loss for all cases was $150,000, with 23.2% losing $1 million or more. Fraudulent activities tended to originate mostly from accounting, operations, sales, executive/upper management, customer service, purchasing, and finance.

The bottom line?  In the words of Ronald Reagan: Trust, but verify.