Study: Small Businesses More Vulnerable To Fraud

Everyone in the business world has been inundated with news about high-profile corporate fraud cases including Enron, WorldCom and Tyco.

(Saturday, November 05, 2005) - Everyone in the business world has been inundated with news about high-profile corporate fraud cases including Enron, WorldCom and Tyco.

What might not be as well-known is smaller companies, those with one to 99 employees, are the next most-affected segment, in terms of size, to lose money from fraud, according to the Association of Certified Fraud Examiners.

According to the 2004 Report to the Nation on Occupational Fraud and Abuse issued by the ACFE, the median cost of fraud for a small firm is about $100,000, which is higher than the losses experienced by all but the largest organizations (10,000 employees or more).

The study reported the median loss for firms with 100 to 999 employees was approximately $78,000, while companies with 1,000 to 9,999 employees experienced a median loss of about $87,000. Organizations with 10,000 employees or more reported a median loss of about $105,000.

Unfortunately, small businesses are less likely to be able to absorb this loss, according to the report. But there are proactive steps a small business can take.

Local firms respond

Kurt Harrington, president of Something Fishy, an aquarium and waterscape design company in Warwick, said via e-mail that at the beginning of this year his company instituted a policy in which each of the 10 employees share in a percentage of the net profit.

The main goal of the program was to eliminate waste, he said, but it also addressed potential scams by employees. In this scenario, everyone is directly affected by the success of the company, he said.

Jason Arabian, president of CM IT Solutions of Central Rhode Island in West Greenwich, said there are “common sense security precautions” like updating passwords and security settings, wiping dating as machines move from one employee to another, and implementing a procedure for dealing with financial and customer information that can help protect companies.

Lorraine Horton, owner of L. Horton and Associates, a forensic accounting firm in Kingston, said the lack of internal audits and inadequate segregation of duties among employees at small firms makes them susceptible to fraud.

“Prevention is 80 percent of the solution,” said Horton, who also serves as secretary of the Rhode Island chapter of the Association of Certified Fraud Examiners.

One of the biggest problems with smaller businesses is that owners tend to trust the people they hired and think they will be able to spot fraud if it was happening, said Horton. This will lead to the same person responsible for receiving the money, reporting the transaction and reconciling the books, she said, increasing the likelihood that fraud will go undetected.

Companies should also review their hiring policies ensuring that background checks are completed along with talking to former employers, said Horton.

Victoria Escalera, university auditor at Brown University and president of the Rhode Island chapter of ACFE, said companies must communicate a low tolerance level for dishonesty and provide an open-door policy or an anonymous hotline to report potential fraud. “Internal control comes from the knowledge that someone who matters is paying close attention and will judge you on whether you do well or poorly,” said Escalera.

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