Most small business owners don’t even consider that their employees might be stealing until it’s too late.

Average small business fraud lasts 24 months and costs $ 200,000 at the time it is discovered according to the 2008 Report to the Nation from the Association of Certified Fraud Examiners (ACFE).

Three former employees of PBS & J, a Miami engineering firm, pleaded guilty in federal court to their role in embezzling $ 36 million in a scheme that lasted more than 12 years. (According to a Miami Herald report on September 29, 2006).

The average American business loses 7% of revenue (sales) due to fraud, more than total profits in many small businesses. There are five main causes of a higher incidence of fraud in small businesses.

1. Trust. Small business owners tend to be closer to their employees, getting to know them both personally and from a business point of view. For an employee to steal from you, you must trust him. Employees tend to be more confident in small companies.

. Reduced manpower. With a small number of employees, many business owners believe that controls are impossible. That is not true. Even with a small number of employees, some controls can be implemented. Even a small number of checks can reduce the likelihood of fraud. For example, the ACFE report indicates that companies with a mandatory vacation / job rotation policy had 61% fewer fraud losses.

3. Don’t delegate. Small business owners tend to want to be in control. As a result, employees are hired, given a job, but important parts of the work are retained by the owner for himself. As a result, there appear to be controls. Unfortunately, the owner has been overloaded with too many tasks; and as a result, they do a poor job of executing them. For example, signing checks without thoroughly reviewing documentation.

4. Overlapping and unclear job responsibilities. In a small business, it often seems like everyone is responsible for everything. If work needs to be done, everyone is expected to contribute. Unfortunately, this provides an opportunity for a dishonest person to bypass the controls by being able to work in more than one part of the business.

5. Controls are not a priority. Lastly, controls don’t seem to be a priority for most small business owners. There is a general “it can’t happen to me” attitude. Unfortunately, it can happen to you! Spending some money now to install a series of preventive controls should be viewed as an investment (no different from an insurance policy), not an expense. Like insurance, you hope you don’t need it, but if you do, the controls may be there to help you.

A former Home Depot employee pleaded guilty in federal court in New York to receiving millions of dollars in bribes from suppliers to ensure the company stocked its products. He shared more than $ 2.5 million in bribes with other company employees in a scheme that spanned three years. (According to a Reuters report of June 30, 2008).

Prevention

1. Acknowledge the possibility of it happening to you. Fraud against businesses is rampant and most business owners don’t realize it until it is too late.

2. Know the common indicators of fraud. There are many indicators of fraud. Business owners need to be aware of and watch out for these red flags. They do not always mean that fraud is taking place, but they do mean that more scrutiny may be necessary.

3. Review and strengthen internal controls and take other measures against fraud. There are many measures that have proven effective in reducing fraud opportunities and providing deterrence. The business owner should be aware of the most common controls and other measures for his particular type of business.

4. As the business owner, take personal responsibility for ongoing follow-up. In a small business, the owner himself must accept responsibility for anti-fraud efforts and monitoring. Trusting an employee with this critical task can be a big mistake if that employee turns out to be a scammer. The ACFE Report also shows that the higher a person is in the organization and the longer they have worked there (in other words, the more they are trusted), the greater the fraud they commit before they are caught.

A 63-year-old man who worked as a Director of Financial Services for a nonprofit organization, pleaded guilty in federal court to diverting more than $ 400,000 in incoming checks payable to the nonprofit to a fictitious bank account. (According to a report by Washington Post on September 24, 2008.)

Where to get help

Internal audit. If you have a larger company, a first line of defense should be your internal audit department. According to Sarbanes-Oxley, public companies are required to submit an internal audit report directly to a Board committee. But even if it is not a public company, the internal audit must report directly to the top. The department with the most fraud incidents is accounting, so it generally makes no sense to have internal auditing within the accounting or finance functions.

Company lawyer. It is important to actively involve the company’s legal counsel in any anti-fraud program or suspected fraud investigations. If you are a larger company, this should be your corporate advisor. If you are a smaller firm, you need a trusted outside attorney with experience in this area to guide your preventive and reactive actions.

External CPA. Many CPAs have been trained and experienced in reviewing controls and recommending improvements. This can be a standalone task or will be done as part of an audit. Remember that accounting controls focus solely on the accounting system. Additional types of controls are needed in other areas to effectively reduce opportunities for fraud. It is important to understand that an accounting audit is not designed to find all fraud, nor is it likely to.

Certified Fraud Examiner (CFE). CFEs are specifically trained and experienced in the area of ​​fraud prevention and investigation. They may also have additional experience in accounting, law enforcement, or other fields.

If you suspect fraud

When the owner (or manager) of a business suspects that an employee is stealing from the business; the most common reaction is emotional. You probably want to call them into your office, confront them, and fire them. In most cases, this reaction will only cause additional headaches and possible financial losses.

In general, it is best to keep your suspicions to yourself until after consulting with a qualified professional and legal advisor. There are many possible issues to consider before deciding on a course of action.

Even if the employee actually stole from you (and we generally don’t know for sure yet), the legal system gives them numerous rights. Get professional help right away to avoid exposing yourself to potential liability.

Foreword

A warehouse supervisor at a hospital in Spokane, Washington, pleaded guilty in federal court to collecting more than $ 600,000 from his PayPal account by selling stolen hospital supplies on eBay. The fraud continued for more than three years. (According to a report by Seattle Times on December 21, 2006.)

If you are a business owner, the time to act is now, not after you’ve incurred a huge loss. Go back to the four steps in the prevention section of this article and start implementing them now.

Not sure how to do it? Proper professional assistance can be a good investment.

As a final thought, remember that while controls can in some cases deter scammers; they cannot stop a determined thief. A strong and ongoing monitoring program is critical to catching fraud earlier, before they turn into major losses.

Good luck in your business and in your fraud prevention efforts!