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Detecting & Deterring Fraud in Small Businesses

Filed under Running A Business.

Fraud can cost a small business a substantial amount of revenue. While you would like to think it could never happen to you -- and we hope you are right -- it makes sense to put plans into place to lessen the chances.

It seems as though a new scam comes to light every day, doesn't it? Phishing, 419s, spoofing and other exotic new words are constantly finding their way into our everyday vocabularies. But if you examine these electronic-media-inspired frauds, you'll soon find that they are just variations on old, low-tech themes.

How much? 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?

How and who? According to the 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.

Vigilant vs. victim! We'll cover the everyday frauds and schemes that can threaten the vulnerabilities of your small business. We'll also discuss how prevention might be achieved by limiting tempting environments and how internal control processes can help prevent, and perhaps catch, budding frauds. 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. But if you do ever become a fraud victim, we encourage you to vigorously prosecute the offender. This is the only way to discourage miscreants from creating future victims.

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