Small businesses can benefit from fraud examination

It may be difficult for the small-business owner to identify with the huge dollar amounts of fraud recently uncovered at such companies as WorldCom, Enron and Tyco, just to name a few. It may even be more difficult to believe that in 2003-2004 privately held companies suffered an average median loss of $123,000 per occurrence, according to a 2004 report by the Association of Certified Fraud Examiners.

Since these highly visible misdeeds, many business stories have focused on financial statement fraud and its impact on the profitability of small businesses.

To show how significant the problem is for small businesses, did you know the following:

• Privately held companies suffered the largest median losses per occurrence, higher than public companies ($123,000 versus $100,000).

• Approximately 46 percent of the frauds in the most recent study attacked small businesses, which were defined as organizations that employ fewer than 100 people.

• The more reliance an organization places on an employee, the more autonomy and authority an employee receives, and the greater the risk of fraud.

• Even if an organization catches an occupational fraud scheme, there is only a 20 percent chance of recovering their losses.

• When more than one person (collusion) conspired to commit fraud, the median loss more than tripled.

• Most occupational fraudsters are not career criminals, and in approximately 80 percent of the cases studied, have never been charged or convicted before, according to the ACFE.

Recently created programs like Southern New Hampshire University’s Institute for Forensic Accounting and Fraud Examination address these many issues. The SNHU institute was developed to help small-business professionals identify fraudulent techniques, understand how fraud significantly impacts the overall financial statements and how to set up controls within the organization to help insure fraudulent activities are reduced or eliminated

Approximately 6 percent of small businesses’ annual gross revenue is lost to fraud. To put this in perspective, if you’re a small business generating annual revenue of $3 million, it is estimated that you are losing approximately $180,000 to fraud.

You probably think this is hard to believe, and it is. Maybe the time has come to be more proactive and explore ways within your organization to detect fraud and to help reduce its occurrence. Isn’t it less expensive to learn some techniques you and your staff can use to deter fraud before it happens?

Richard O. Hanson is professor of accounting and taxation at Southern New Hampshire University.