Fraud and the Entrepreneur

Fraud in business has been one of the most pervasive elements to confront our society. From information provided in Catching the American Dream by Dr. JoAnn and Jim Carland they indicate it amounts to an average loss of 6% of gross revenues in a business today. They also report that the number of investment fraud cases has risen 60% in the last five years.

When you couple that information with an article from the Washington Post in August 2008; post reporter Sharon McLoone cites from the 2008 report from the Activated Certified Fraud Examiners. She states in the report the medium loss to business with less than 100 people was $100,000. The report also goes on to say that over 46% of all cases in the ACFE study occurred in companies with 100 or less employees. Within industry sectors, manufacturing, banking and general services reported the highest number of fraud incidents.

On the RSM McGladrey website they report that; “in 2005, the Global Economic Crime Survey reported that internal controls caught only 30 percent of all North American fraud cases.”

When you look at the size and the scope of the problem it is easy to understand how difficult it would be for a small business to absorb a 6% loss or an average of $100,000. Most small businesses are in need of every available dollar so how then can fraud occur. It is usually due to a lack of internal controls being put in place; for example regular monthly audits. Without the available funds or personnel to establish controls or put security in place; small businesses are more vulnerable to fraud.

Since most small businesses usually have fewer employees, fraud also can becomes a more personal issue related to trust; more so than in a large firms. Many times the small business owner will have hired the individual responsible for the internal fraud; that fact can make the incident more difficult to accept and deal with swiftly.

Fraud takes on many faces today from a customer shoplifting, to return goods scams, employees writing checks or withdrawing funds, setting up ghost employees to be paid, padding expense accounts, submitting fake supplier invoices, removal of products or property, computer identity thefts; to high level executives spending company funds for personal uses.

Aside from the internal controls and security type measures that should be put in place; a business can take other steps to prevent fraud. First is the initial screening process, with regard to hiring your staff; this is in my view must be a delicate balance between selecting the correct person by examining background, character and references but it must not be personally intrusive. Some suggest the use of a credit check on potential employees; personally in my view, that should depend entirely on the position and the type of business. Although many may have nothing to hide from an employer; I believe many would be offended by such a suggestion. I have heard it said, that only suspicious people; tend to be suspicious themselves. The other fact is, obtaining someone’s credit information in a time constant threats of identity theft; could leave an employer open for a lawsuit if the potential employee’s information fell into the wrong hands. Since small businesses already have a difficult task with regard to internal controls; taking on a new area of information that must be kept secure, and controlled seems to be an unnecessary risk.

The next is to reduce or eliminate the chance for opportunity; such as, providing few if any employees with all the keys, maintain any costly inventory items under lock and key, keep certain areas as off limits, do not provide one employee with access or control to all the companies’ cash and financial accounts. Have the computer systems regularly inspected for improper software and uses. Provide flexible but honest guidelines for employee expense accounts, and supplier interaction guidelines. Also maintain a culture of high ethics and honesty within the company for your managers, employees, and you to follow; thus leading by example.

If you as the owner show respect courtesy, honesty and ethical behavior by treating your customers, employees and suppliers as valuable additions to your business they should do likewise. However, in addition internal controls need to be maintained and updated regularly to protect you and your company.