The forgotten risk

Occupational fraud and its impact on small business

Small businesses are the most frequent victims of occupational fraud. Thirty percent of organizations with fewer that 100 employees are victims of fraud. That's a higher percentage than any other size business.

The impact of fraud is far greater on small businesses: The typical loss in annual revenues due to fraud may be a concern for a large business. For a small business it could mean the difference between profitability and bankruptcy. The median loss due to occupational fraud is $150,000 annually. This represents a 5% to 6% loss in annual revenue for a small business. The per employee loss is 100 times greater for small business than larger businesses.

Small businesses have fewer resources to fight fraud: The working environment and limited staff size of small businesses required an increased level of trust. Trusting the wrong person can lead to disaster. While some internal controls may be too expensive for small businesses, others can be implemented with minimal investment.

Small business owners are victims of their own optimism: They are inherently optimistic and passionate about people and circumstances. They cultivate a family feeling and culture of trust. Money is rarely a priority for a small business owner and many lack financial expertise. Insufficient staff resources forces a focus on customer/client needs, not internal needs.

The risks extend beyond cash and inventory theft: More small businesses report being victims of billing schemes than of cash or inventory thefts. The handling of accounts payable and accounts receivable appear to be the biggest areas of risk to small businesses.

Most small business frauds last two years before discovery: Small businesses do not have the controls or staff in place to quickly discover frauds, even those as simple as pilfering the petty cash. As a result, the damage compounds.