How Serious is Fraud for SMBs?

Before you can deal with employee fraud in your organization, you need to know how big the problem is. Unfortunately, if you’re like many other small and mid-size businesses (SMBs), you may believe that fraud and misallocation of assets is really only an issue for the “big boys.” Those might be the instances we hear about most in the nightly news; however, it’s only due to the high profiles of the corporations and large sums of money typically involved.

Statistics don’t lie, though.

Fraud in SMBs is becoming more prevalent than in their larger counterparts. In fact, according to the Association of Certified Fraud Examiners (ACFE), SMBs (those with < 100 employees) were victimized in the greatest percentage of cases reported to them.

In addition, the median loss for SMBs and the largest entities (those with > 10,000 employees) were the highest at $154,000 and $160,000, respectively. While the median loss for the largest entities is slightly higher than for SMBs, it is important to note that the overall impact of a “$154,000 loss” is much more dangerous for an SMB when compared with a “$160,000 loss” for an entity with over 10,000 employees.

What’s more, according to the ACFE, is that nearly 5% of annual revenues are lost each year as a result of fraudulent activities by employees, managers, owners, and executives. Applied to the estimated 2011 Gross World Product, this figure translates to a potential projected global fraud loss of more than $3.5 trillion. In addition, most cases of fraud typically occur for around 18 months before being detected. That’s a lot of time for a rogue employee to make an impact.

For SMBs, cases of fraud typically involve activities surrounding billing, check tampering and non-cash theft. A lack of internal anti-fraud controls, training, and management oversight provide fraudsters with plenty of opportunity. 

So the question is: how can you protect your company?

A financial audit will not address the issue. In fact, CPAs only identify about 3% of instances of fraud during audits, while management finds 6% of frauds by accident. That means you have a better chance of stumbling upon a case of fraud in your organization than a CPA does of detecting it.

To deal with fraud, you need a professional financial forensic fraud examiner. They are trained specialists who know where to look to find fraud, how to expose it, how to determine its impact, and how to put effective safeguards in place so it doesn’t happen in the future.

If you own or operate an SMB, you work hard to capture growth opportunities and new revenue streams. However, if you’re not addressing fraud, you’re working with a 5% “hole in the bucket.” Think of the value an additional 5% in revenue would provide to your business, all without incurring added sales and marketing expenses and no change in costs of goods sold.

At Lakelet Advisory Group, we are here to assist your organization in dealing with fraud. By implementing a fraud risk assessment program, we can help you identify potential risk exposures, as well as the needed anti-fraud controls that will protect your assets – and your bottom line.