Inside Job: Why Employee Fraud Has Double the Impact on Small Businesses

Entrepreneurship is woven into the very DNA of the United States, and about 625,000 new businesses open their doors every year. Small businesses employ nearly half of all Americans and account for about 99 percent of businesses in the U.S.

Only a sliver of businesses will remain open long-term, however, as just under a third of businesses stay open 10 years or longer. Business owners face long odds for survival, and the story is often sadder for small businesses. All the issues that impact bigger businesses, whether internal or external, are amplified when those issues affect a small business, as there simply are fewer resources to recover from setbacks.

That’s why one hidden issue that’s draining small businesses is so devastating — employee theft and fraud. Any small-business owner wants to believe that their company’s very lifeblood is in their workforce, and that’s true for most of them. But for a few unlucky companies — more than a few, actually  — the danger is coming from inside the house.

Globally, employee fraud schemes cost companies billions, with at least $7 billion in total losses, according to a report by the Association of Certified Fraud Examiners (ACFE), which has analyzed employee theft around the globe since 1996. While bigger businesses may at first seem to be better targets (if they’re bigger, they must be richer, right?), it’s actually small businesses that should be the most concerned, as employee theft is nearly twice as bad for smaller firms.

Snapshot of
Occupational Theft & Fraud

Thousands of workplace fraud schemes are uncovered every year, and countless others go undetected. In fact, most employee theft plots stretch out over at least a year, with the median length of a known fraud reaching 16 months.

While the median loss reported was $130,000, nearly 1 in 4 cases involved losses to the business of more than $1 million, and a majority businesses never recovered any of the stolen money or goods.

Typical losses vary widely by industry. Retail, an industry that takes very seriously theft and fraud of all kinds, from shoplifting to skimming from the register, has the lowest median loss due to workplace theft incidents.

Small Business, Big Problem

Big companies are more likely to have the kind of infrastructure that can help detect or even prevent fraud, but their large size also increases the pool of potential thieves. Still, businesses with fewer than 100 workers not only had the largest share of schemes detected overall, but their median loss was about twice that of bigger firms.

Small businesses lose double the amount to schemes as some of their larger counterparts, and it’s easy to understand why. Small businesses usually have fewer methods of detecting fraud and theft. More than 40 percent of the schemes impacting the smallest firms were caused by a lack of internal controls, and 29 percent were perpetrated by owners or executives.

Preventing Employee Theft & Fraud

Which methods of preventing or detecting workplace malfeasance are best for each business will depend largely on what industry the business is in since not all schemes are widespread in all industries. For instance, organizations without cash registers, like schools or hospitals, should worry a bit less about cash skimming than, say, retail shops, where employees have near-constant access to the register.

But a few best practices apply across a range of business types, sizes and industries, and for any business, the first step is observing employees. That doesn’t necessarily mean watching over their shoulders, but good anti-fraud programs will center on observing employee behavior, even things that seem innocuous. According to the ACFE report, scheme perpetrators exhibited at least one common behavioral red flag in 85 percent of detected cases. The six biggest fraud red flags are:

Female perpetrators were about 15 percent more likely to be experiencing financial difficulties, while men were more than twice as likely to display a suspiciously close relationship with a vendor or customer. About 14 percent of scheme perpetrators have poor performance evaluations, and more than 1 in 5 have been the subject of bullying or intimidation complaints by coworkers.

Conclusion

It’s hard out there for small businesses, and given how few new businesses survive, you do yourself no favors by being passive about inside theft, fraud and corruption. That means understanding why and how people conceive of and perpetuate these schemes. That starts with creating a culture of honesty and accountability and ensuring that, even at a tiny family business, reasonable fraud controls are in place.

No business owner wants to believe their workers are thieves, and the truth is that almost none of them start out that way. Only 4 percent of scheme operators have previous fraud convictions. Particularly for small businesses, the cost of employee fraud is enormous, and if your business is small enough, there’s a good chance it won’t survive an attack from the inside.

About This Report

The Association of Certified Fraud Examiners (ACFE) conducts an annual report that’s the most comprehensive, global look at workplace fraud, theft and corruption. The bulk of the statistics included in this story came from the organization’s most recently released report, which you can check out here. It’s a fascinating look at a problem so large that few people really comprehend its scope, and the document covers only known fraud. Much more goes unreported or undetected.

For information on business and small businesses in the United States, we consulted the U.S. Small Business Administration. You should note that while the SBA defines a small business as one with less than 500 employees, the ACFE report says small businesses are those with fewer than 100 employees. Our state-by-state analysis of fewer-than-100-employee businesses was done using an SBA dataset you can find here.

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