Small Businesses Suffer from Company Fraud

Any business is vulnerable to fraud within its ranks, but small firms are especially susceptible, according to new data from the Association of Certified Fraud Examiners.

The median loss suffered by organizations with fewer than 100 employees was $200,000, a figure higher than the median loss in any other category including the largest organizations. Check tampering and fraudulent billing were the most common small business fraud schemes, found in the Report to the Nation on Occupational Fraud and Abuse (pdf).

The study was based on data compiled from 959 cases of occupational fraud that were investigated between January and February 2008.

The typical fraud in the study lasted two years from the time it began until it was caught by the victim organization. The most common fraud scheme for businesses of all sizes was corruption, which occurred in 27 percent of all cases. Fraudulent billing schemes happened in 24 percent of the cases.

Financial statement fraud was the most costly category with a median loss of $2 million.

Occupational fraudsters are generally first-time offenders, the fraud examiners found. Only 7 percent of fraud perpetrators in the study had prior convictions and 12 percent had been previously terminated by an employer for fraud-related conduct.

The experts also said that fraud perpetrators often display certain behaviors that can indicate possible illegal activity. The most commonly cited red flags were the criminals living beyond their apparent means, which occurred in 39 percent of the cases, or experiencing financial difficulties, which happened 34 percent of the time. In financial statement fraud cases, excessive company pressure to perform well was a particularly strong sign.

Most businesses surveyed said they did not have internal controls for spotting fraud and most information about a possible fraud came from a tipster.

Small Business Readers - Do you have internal controls at your business for combating fraud or is fraud something you've ever considered could happen at your business?

By Sharon McLoone |  August 8, 2008; 4:50 PM ET Data Points
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Perhaps one reason the practice is more prevalent in SMBs is because of limited resources (and perceived repercussions from making headlines). One way for small business leaders to prevent fraud within their own company is through peer-to-peer networking groups. In a confidential setting, chief executives can discuss what they’ve done to thwart would-be embezzlers and other fraudulent activity that is so common in “Main Street businesses.” Or they can candidly explain how they handled fraud within their company, allowing others to benefit from their experience. Organized peer networking can counter the resource crunch. Issues such as fraud prevention and hiring the right people for the job are continually discussed in CEO groups like the one I work for. At Vistage International, we gather executives from non-competing industries into groups with up to 16 other CEOs to process issues monthly. Led by a group mentor, our CEO members find their Vistage learning experience invaluable when making important decisions surrounding their business that they might not be able to discuss with their board, employees or possibly even their spouse. For more information or to find a Vistage group in your area, go to

Posted by: Tony Vignieri | August 13, 2008 12:45 PM

Small and Medium Scale Industries [or SMIs as the SMBs are referred to in Malaysia] have always been at risk to fraud that is greater when compared to the larger companies/organizations that have the resources to audit and monitor the operations and enforce the prescribed procedures and internal controls.

The contributoring factors that have been observed during audit and training seminars would include the following:

[a] Expansion beyond monitoring capacity due to limited resources
[b] Non enforcment of internal controls
[c] Absence of Internal Audit
[d] Reluctance of disciplinary/legal action on discovered frauds
[e] The Fraudsters could be key personnel within the SMB organizations.

Above is common in most countries.

Gursharan Singh C.M.I.I.A.
Kuala Lumpur, Malaysia

Posted by: Gursharan Singh C.M.I.I.A. | August 13, 2008 10:01 PM


Posted by: abe adekunle julius | August 14, 2008 3:23 AM

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