Fraud is a huge concern throughout US and worldwide business with billions being lost to this each year, not to mention the further costs incurred in recovering from fraudulent activities.
Fraud affects smaller business more than larger ones, too. According to the most recent report into fraud produced by the Association of Certified Fraud Examiners (ACFE), while the median loss to businesses generally was $130,000 the median loss suffered by companies with fewer than 100 employees was $200,000 – nearly double that of businesses with 100 or more employees who suffered median losses of $104,000.
Why are smaller businesses more susceptible to fraud?
It’s a combination of complacency, different fraud types and the fact that a key way in which fraud can be detected – tip offs – is less prevalent among smaller businesses. The lack of investment in anti-fraud measures that would help combat common small business fraud types – such as check tampering by using secure checks and inadequate or even non-existent staff training – is another cause.
In larger businesses tip offs (usually from employees) that fraud is happening or has taken place ranks as a high fraud detection method in larger businesses according to the above-mentioned report, with some 44% overall being detected in this manner.
This contrasts with only 29% in smaller businesses.
Different fraud types
As mentioned earlier, check tampering is a common small business fraud; it’s about three times more likely to occur in a smaller businesses compared to larger concerns and accounts for some 22% of SME frauds.
Unfortunately, many smaller businesses don’t consider themselves ‘big enough’ to fall victim to fraud. Indeed, a report by an email fraud prevention business found some 48% of small businesses surveyed considered their businesses were too small to be seriously affected by fraud.
As the ACFE’s fraud figures show this is clearly not the case – and is a myth that needs to be debunked.
Lack of investment
If smaller businesses generally consider their fraud risk to be low then it unfortunately follows they don’t invest enough in anti-fraud measures.
There’s also the issue of increased use of technology by smaller businesses bringing its own extra fraud risks: more elaborate systems add to security vulnerabilities and thus fraud possibilities. While larger businesses are more inclined to invest in security and anti-fraud measures to accompany technological growth, smaller businesses generally might not.
Different fraud methods
A significant way in which fraud differs between small and larger companies is in the level of fraudulent activities by owners or senior executives.
Owners and executives were responsible for nearly 30% of small business frauds – nearly twice that of larger businesses. These frauds can be more damaging as, since it’s senior personnel with decision making power and influence, these frauds can go undetected for longer.
Along with check and payment tampering being more common in smaller businesses as discussed earlier – 22% in smaller businesses compared to eight in larger ones – so too is skimming and payroll fraud.
Ad hoc fraud detection
In general, larger businesses are more likely to have various controls in place to combat fraud such as data monitoring, analysis and ‘surprise’ audits – the key methods to reduce and detect fraud. That said, the ACFE report found fewer than 40% of businesses overall used these as a matter of course.
It’s clear that SMEs have a major fraud issue and it’s costing them considerable sums. It’s also clear more diligent fraud prevention and detection would be worthwhile; the ACFE offer help in this regard with fraud prevention check-ups and downloadable advice.
This is an article provided by our partners network. It does not reflect the views or opinions of our editorial team and management.
Founder Dinis Guarda
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