Three steps to prevent your business from being crippled by fraud
Just under 50% of small businesses will experience some form of fraud during the life of the business.
A National Small Business Association survey reports that, “Eighty-four percent of small-business owners are concerned about fraud in connection to their business finances. Online identity theft topped the list of concerns (65 percent). Check fraud (45 percent) and credit card fraud (52 percent) were the most frequently experienced types of fraud. Forty-seven percent of those who reported being a victim of fraud estimate losing more than $10,000, and more than half of those individuals estimate losing in excess of $50,000.”
These are big numbers. But the potential impact this type of fraud represents to a small business pales in comparison to the risk of occupational fraud.
In the 2010 “Report to the Nationson Occupational Fraudand Abuse” by the Association of Certified Fraud Examiners (ACFE), “Asset misappropriation schemes were the most common form of fraud in our study by a wide margin, representing 90% of cases — though they were also the least costly, causing a median loss of $135,000. Financial statement fraud schemes were on the opposite end of the spectrum in both regards: These cases made up less than 5% of the frauds in our study, but caused a median loss of more than $4 million — by far the most costly category.”
Those are even bigger numbers.
Fraud in any form is abhorrent. At the least it’s a tremendous drain on your business’s cash flow. At its worst, fraud can undermine your entire business.
As Vistage Chair I was told that it’s a matter of when, not if, a member of my group would experience fraud. Last year one of my members discovered an event over $125,000. They’re recovering – and the whole group has responded by focusing on prevention. Here are three crucial steps that we’ve discussed, and that they’re putting into action.
1. Do your employees know what fraud is?
You might be surprised – and it’s well worth your time to educate them. Make sure they know that fraud includes the smallest of T&E cheats or “liberated” office supplies.
In my first sales job, I watched a regional manager lose his six-figure job … because he’d charged a $50 battery for his wife’s car on his company credit card.
2. Do your employees have a safe way to report fraud without fear of reprisal?
By the time your auditors discover what’s happening, you’ve already lost more than you can afford. If you enforce a zero-tolerance policy, making it clear that no employee will be penalized for reporting instances of fraud, you have a much better chance of stopping it early.
3. Do you have the appropriate checks and balances?
I’ve known many companies where the person who writes the checks is also the person who balances the statements. (That’s not just a play on words with “checks and balances”!)
No one should have ultimate authority. It’s unfair to your employees to put this type of temptation in their way, and it’s unfair to your business to leave the door open in this way.
Fraud is one of those things people believe “won’t happen to me.” Some business owners even feel that putting prevention measures in place will make their employees feel that they’re not trusted.
But the cost of fraud is tremendous – as Enron employees and stockholders discovered.
Are you willing to take the risk that your business could be one of the 50% that suffer serious financial damage from fraud?
You can download the full 2010 ACFE report, with recommendations and a checklist on page 80, from the ACFE website at http://www.acfe.com/rttn/rttn-2010.pdf
