Report finds big fraud problems for small businesses

Occupational fraud continues to siphon staggering amounts of money from businesses worldwide, with smaller organizations being hit particularly hard.

That’s one of the trends identified in the 2018 Report to the Nations on Occupational Fraud and Abuse, released Tuesday by the Association of Certified Fraud Examiners. The biennial report, which is based on thousands of fraud cases reported by fraud examiners worldwide, provides a detailed look into how fraud is being perpetrated, detected, and combatted in various industries and regions worldwide.

The median loss of the 2,690 frauds covered in the report was $130,000, but businesses with fewer than 100 employees suffered a median loss of $200,000, nearly double that of the $104,000 median loss reported for companies with 100 or more employees. In the 2016 report, examiners reported a median loss of $150,000 for small and large businesses.

Fraud is a particularly painful problem for smaller businesses because they have fewer resources with which to withstand occupational fraud, which refers to crimes committed against the organization by its own employees, directors, or officers. Limited resources also contribute to small businesses being far less likely than large organizations to use any of the 18 anti-fraud controls tracked in the Report to the Nations.

Hotlines provide perhaps the most vivid example of how the lack of a control makes small businesses more vulnerable to fraud. Tips were by far the most common initial detection method for frauds covered in the report, and small businesses were less than half as likely as their larger counterparts to have a hotline for employees to call in fraud tips anonymously. This contributed to the following data points:

• While 44% of frauds at larger businesses were detected by a tip, only 29% of frauds at small businesses were.
• While a lack of controls contributed to only 25% of frauds at larger businesses, it accounted for 42% of frauds at small businesses.

Fraud differs in other ways at businesses with fewer than 100 employees:

• An owner or executive committed nearly 29% of frauds at small businesses, compared with 16% at larger businesses. That’s particularly bad because frauds perpetrated by owners or executives produced median losses of $850,000.
• Some frauds occurred much more frequently at small businesses. For example, check and payment tampering was nearly three times more likely at a small business than a larger one (22% to 8%). Other frauds much more common at small businesses included skimming (20% vs. 8%) and payroll (13% to 5%).

All told, the 2,690 cases of occupational fraud covered in the report came from 23 industry categories in 125 countries. The median duration of those schemes was 16 months, and total losses for just those cases topped $7 billion. Other top-level findings in the report include:

• Asset misappropriation schemes accounted for 89% of the frauds but caused the lowest median loss at $114,000. Financial statement fraud produced the highest median loss at $800,000 but was the least common at 10%.
• Losses caused by men were 75% larger than losses caused by women.
• Median losses soared when two or more fraudsters colluded, from $74,000 with one fraudster to $150,000 with two fraudsters and $339,000 with three or more collaborators.
• Of the 18 internal controls studied in the report, data monitoring/analysis and surprise audits were correlated with some of the largest reductions in fraud loss and duration, but only 37% of organizations employed those controls.

The full Report to the Nations is available at ACFE.com/RTTN.

— Jeff Drew (Jeff.Drew@aicpa-cima.com) is a JofA senior editor.