Preventing Occupational Fraud in Small Businesses

Many people believe that fraud and theft occur predominately at large businesses. In fact, small businesses are more likely to experience fraud and suffer greater losses than larger businesses because they tend to employ fewer anti-fraud controls.

According to the Association of Certified Fraud Examiners in its 2012 report, the typical organization lost 5% of its revenue to fraud.  Some interesting findings include:

  • The typical fraud lasted 18 months before being discovered.
  • Approximately half of the frauds detected were reported by company employees.
  • The majority of the frauds detected (77%) were in the accounting, operations, sales, executive/upper management, customer service or purchasing departments.
  • Most fraud (over 80%) was committed by first time offenders.
  • About half of the victim companies never recover their losses.
  • In 81% of the cases, the perpetrator display one or more of the common behavioral traits. The most common traits were, living beyond means (36% of cases), financial difficulties (27%), unusually close association with vendors or customers (19%) and excessive control issues (18%).
  • Existence of anti-fraud controls significantly decreased the length and severity of the fraud.

Here are a few suggestions to minimize the risk of fraud:

  • Establish a fraud policy-Define fraud, what to do if it is detected and explain the consequences.
  • Establish a method to report suspected fraud-Use of a third party ombudsman is advisable. Employees are more likely to report suspicious activity to an unrelated party if they are able to remain anonymous.
  • Strengthen hiring practices- Conduct background checks for employees that will be handling money, inventory or other valuable assets.
  • Improve internal controls-Establish adequate controls to safeguard assets.
  • Monitor cash-All cash handling activities should be monitored by camera or by other employees. Theft is less likely when someone knows they are being watched.
  • Require mandatory vacations-Fraud is often discovered when the perpetrator is absent and not able to continue their cover up.

Review the entire Association of Certified Fraud Examiners report at



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