Here are some things businesses can do to guard against fraud
Small businesses in Hawaii have good reasons to worry about fraud. According to the Association of Certified Fraud Examiners, small businesses (those with fewer than 100 employees) in 2006 had the highest median loss for fraud cases and were the most heavily represented group, making up 36 percent of all frauds in the study.
Previous ACFE studies showed similar trends: Small businesses are extremely vulnerable to fraud.
Why small businesses?
There appear to be three main reasons:
» Inadequate employee prescreening: Many small businesses often cannot afford the amount of time and money necessary to conduct a thorough screening process for their potential hires. Checking criminal records, work and professional references, drug and psychological testing are rarely considered or performed in small businesses. Undesirable applicants are aware of this, and it makes applying at small businesses more attractive.
» Limited controls: The backbone of preventing fraud is to have adequate segregation of responsibilities among the employees. It is one thing to steal from your employer acting alone, but an entirely different story to enlist the aid of a coworker. Small businesses usually do not have the personnel to provide a sufficient segregation of duties, giving birth to the all too common "one-person accounting department."
» Too much trust: With just a few employees, people get to know each other fairly well and that generally leads them to trust one another. Many people find this to be one of small business' most appealing features.
The predicament is that trust is a component of business as well as a component of fraud. Not having faith in your employees is negative, but trusting them too much can be potentially harmful.
The following are three anti-fraud procedures small businesses can perform:
» Education: Educating employees on how to recognize fraud and also how or why it occurs can be very beneficial to a small business because employees will likely hear about fraudulent behavior before management.
» Oversight: Key employees and management need to know about common fraud practices and schemes so that they can be involved in fraud prevention. For example, a small business owner should receive an unopened bank statement so that it can be reviewed for suspicious disbursements or transfers. These key personnel also need to understand how their business' revenue and expense processes occur so that they can recognize anything abnormal.
» Reasonable personnel policies: Research has shown that employees are more likely to commit fraud when they think they are being treated unfairly, or if the owner of the business is deceptive. Owners need to lead by example and also provide respect and reasonable compensation to their employees. Employees that are faced with poor management or unreasonable policies may respond with inefficiency and fraudulent activities, justifying their behavior against their grievances.
With Hawaii's large number of small organizations, and the high cost of running companies, these steps can help prevent losses and minimize disruptions to your small business. These measures may seem expensive, but you'll be saving yourself the heartache of lost revenues and lost amity.
is a certified fraud examiner and a partner in the Honolulu office of Grant Thornton LLP. He can be reached at Patrick.Oki@gt.com