Detecting & Deterring Fraud in Small Businesses

 

I want to know more about Search

 

"The man who is admired for the ingenuity of his larceny is almost always rediscovering some earlier form of fraud. The basic forms are all known, have all been practiced. The manners of capitalism improve. The morals may not." — John Kenneth Galbraith, American Economist (1908-1977)

It seems as though a new scam comes to light every day, doesn't it? Phishing, 419s, spoofing and other exotic new words are constantly finding their way into our everyday vocabularies. But if you examine these electronic-media-inspired frauds, you'll soon find that they are just variations on old, low-tech themes.

The Association of Certified Fraud Examiners (ACFE) publishes an annual Report to the Nation on Occupational Fraud and Abuse. The study attempts to define emerging fraud techniques as well as quantify the economic impact these crimes have on our economy. The current report (Spring, 2008) indicates that frauds perpetrated against small businesses continue to cost more on average than those against larger firms. The average cost of a fraud event targeting businesses with fewer than 100 employees was $200,000 for the period of January 2006 through February 2008 (the last period for which complete data was available.) According to the report, the most common frauds in small businesses are of the occupational variety, including check tampering, revenue skimming and fraudulent invoicing.

While occupational frauds in all (small as well as large) businesses are the most abundant in sheer number of events, financial reporting fraud (a la Enron) and medical insurance fraud are the most expensive. Our discussions in this module will concentrate for the most part on the most common occupational frauds since these are the biggest threat to small businesses, but we'll touch on some of the others so you'll have a passing familiarity with them. This will not be a detailed 'How To' manual for wannabe fraudsters. Our mission is to raise your awareness of the various types of fraud in general.

We'll cover the everyday frauds and schemes that can threaten the vulnerabilities of your small business. We'll also discuss how prevention might be achieved by limiting tempting environments and how internal control processes can help prevent, and perhaps catch, budding frauds. Educating yourself on the scope of this growing challenge and the tools you might use to minimize its impact on your business is your first step to avoid becoming a victim of fraud. But if you do ever become a fraud victim, we encourage you to vigorously prosecute the offender. This is the only way to discourage miscreants from creating future victims.

Tip Learning Objectives for this Toolkit Module You need to recognize various frauds, your flaws/vulnerabilities to them, and how to fix or prevent them by: learning what various common frauds look like assessing your particular business for weaknesses that may expose you to fraud determining what techniques might be used to deter and/or detect these frauds crafting, enforcing and regularly updating formal policies and procedures to combat fraud

The following three sections and tools will cover internal and external frauds as well as strategies for managing them.

And from time to time, we'll be adding to these sections as fraud is a dynamic creature, always evolving new variations on old themes.

• Internal Fraud Threats -- Internal threats can come from employees, managers and even owners.
• External Fraud Threats -- External frauds commonly originate with or involve customers and vendors.
• Managing Fraud Vulnerabilities -- Strategies for detecting and deterring fraud from whatever source.