How to Detect and Deter Fraud in a Small Business

Filed under Detecting & Deterring Fraud. Fact checked on May 24, 2012.

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Whether committed by employees, vendors or unknown individuals, the need to protect your business from fraud is an unpleasant fact of life for the small business owner.

Running a business is a challenge for most small business owners. Throw fraud into the mix and the challenge rises to a new level. It seems, as though a new scam comes to light every day, with electronic-media inspired frauds such as phishing and spoofing, joining old, low-tech fraud themes.

Scope of the Fraud Problem

The Association of Certified Fraud Examiners (ACFE) publishes a periodic Report to the Nations on Occupational Fraud and Abuse. The study attempts to define emerging fraud techniques as well as quantify the economic impact these crimes have on our economy.

The Association of Certified Fraud Examiners (ACFE) publishes an annual Report to the Nations on Occupational Fraud and Abuse. The study attempts to define emerging fraud techniques as well as quantify the economic impact these crimes have on the economy of 94 nations. The current report (2012) indicates that frauds perpetrated against small businesses continue to cost more on average than those against larger firms. The median loss from a fraud event targeting businesses with fewer than 100 employees ranged was $147,000 for the period of January 2010 through December 2011 (the last period for which complete data was available.) Quite a chunk of your profits?

According to the ACFE report, the most common frauds in small businesses are of the occupational variety. Billing (invoicing) fraud led the way. And, check tampering, payroll and skimming schemes were far more common in smaller organizations than in larger ones.

While occupational frauds in all (small as well as large) businesses are the most abundant in sheer number of events, financial reporting fraud (a la Enron) and medical insurance fraud are the most expensive. Our discussions in this module will concentrate for the most part on the most common occupational frauds since these are the biggest threat to small businesses, but we'll touch on some of the others so you'll have a passing familiarity with them. 

This will not be a detailed 'How To' manual for wannabe fraudsters. Our mission is to raise your awareness of the various types of fraud in general, not to provide ammunition to the criminal element.

Tip

If you do ever have the misfortune of becoming a fraud victim, we encourage you to vigorously prosecute the offender. This is the only way to discourage miscreants from creating future victims!

Steps Every Small Business Needs to Take Against Fraud

Educating yourself on the scope of this growing challenge and the tools you might use to minimize its impact on your business is your first step to avoid becoming a victim of fraud. This requires that you familiarize yourself with the everyday frauds and schemes that can threaten the vulnerabilities of your small business. You need to consider internal and external frauds, as well as strategies for managing them.

Warning

Unfortunately, people constantly devise new and imaginative ways to steal or cheat, so the task of identifying and dealing with potential problems is an ongoing process.

Then you can take preventive measures that limit tempting environments and use internal control processes that can help prevent, and perhaps catch, budding frauds. This process may include crafting, enforcing, and regularly updating formal policies and procedures to combat fraud.

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