Small businesses are victimized by embezzlement far more often than bigger companies, according to a survey this year by the Association of Certified Fraud Examiners, a trade group based in Austin, Texas.
In fact, 31% of all business frauds nationally were in companies with fewer than 100 employees, according to the study, and an additional 23% were suffered by those with under 999 workers. Only 21% were committed in companies with more than 10,000 employees.(More after the break.)
What's more, small businesses in the U.S. typically suffer larger losses than big companies do. The median loss for companies with fewer than 100 employees was about $150,000—compared with $84,000 in businesses with payrolls exceeding 10,000.
Andi McNeal, director of research at the ACFE, says small businesses are relatively easy targets for internal fraud "because there are usually less formal financial controls. There's usually a lot of trust put in one person, which may be necessary for these businesses to run, but it can come back to haunt."
So, how to protect your company from fraud? Here are some tips from the association.
• If you're delegating responsibility for accounts receivable and the company's disbursements, don't put the same person in charge of both, even if it means you have to hire an additional employee.
• Bring in an outside accountant at least once a year to review your business financial records. Typical fees are $100 to $150 an hour, depending on how organized your records are. Consider retaining different outside accountants occasionally to have a fresh eye involved in the review.
• Be aware of employees who are involved with your company's finances and never take time off. Embezzlers rarely take vacations for fear their theft will be discovered by someone filling in.
• Embezzlers usually spend the money they steal very quickly. Tip-offs include changes in lifestyle such as spending on expensive cars and vacations.
• One common internal fraud is kickbacks involving vendors, so stay alert to unusually close relationships between employees responsible for finances and suppliers and customers.
• Be the first person to open your monthly business bank statements. Even if you don't have time to examine them closely, your attention sends a message to any potential fraudster.
• When perusing your bank statements, don't just look at the numbers; examine the actual images of canceled checks. Otherwise you can't confirm where the money really went.
• Remember that some internal theft doesn't leave an audit trail.
For example, skimming involves stealing a company's cash before the receipts are entered into the accounting ledger. In a sales skim, the fraudster collects a customer's payment at the point of sale and simply pockets the money without recording it. The loss may come to light only via clues such as inventory shortages or lower-than-expected cash flow.
• Look at receipts for deposits of both federal and state taxes.
• Remember that liabilities can double the amount of taxes due, including penalties and interest, within a year, so don't take more than a few months between your informal audits.
• Maintain an open-door policy that encourages employees who have suspicions about misappropriations or questionable spending to tell you in confidence.
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