Small and medium businesses (SMEs – organisations with 100 employees or fewer) are losing an average of US$200,000 every time they suffer a fraud, according to an international study published by the Association of Certified Fraud Examiners (ACFE).

SMEs are as vulnerable to fraud as large organisations, but the causes and nature of the frauds in smaller businesses are of a different type.

Detection

An SME is less likely than a large organisation to receive a tip-off that fraud is happening. This is because of its close-knit social environment: in an SME all the employees know each other. So a policy of whistleblowing will have limited effects.

An SME naturally generates a higher level of trust in employees to do the right thing and protect the organisation, but the ACFE is spot-on when it says that fraud can be particularly devastating to small businesses. SMEs lack the dedicated resources to implement robust controls to prevent and recover from fraud, and 42% of fraud committed in SMEs are the direct consequence of internal control systems being non-existent, deficient, incomplete or inadequate.

SMEs should focus on having simple and efficient controlling tools, such as checks by a second employee on all financial transactions above a defined amount. There are a lot of ways to put controls in place without hiring new staff or buying new software.

The roots of fraud

The ACFE identified six frauds that are committed the most in SMEs, the majority directly linked to the finance function:

1. Corruption – the abuse of entrusted power for private gain (as defined by Transparency International). This is the most common fraud.
2. Billing – fake billing, over-billing – comes next.
3. Cheque and payment tampering – interception of funds by employees – is as frequent as billing fraud.
4. Expense reimbursements – double reimbursement claims, fake expenses.
5. Skimming – theft of cash before it even gets to the company’s accounting systems.
6. Stealing cash.

Implementing tighter controls involving double checks on some transactions or specific projects adds robustness to overall financial workflows. Segregating tasks and having a rotation system within the team that has access to finance would also be effective. An SME might not be able to implement all these measures – the ideal combination to deter fraud – but making a start by putting just one in place at least gives the right signal.

All risks of fraud can be mitigated and its damage reduced with the right procedures, training sessions for employees and regular checks and controls.

If the task feels too complex or too time-consuming in your busy business, we can do the job for you. Just get in touch.