Small Businesses, Big Risk: Fraud Controls Lacking at Organizations with Fewer Than 100 Employees
Ken Tysiac · Journal of accountancy online/Journal of accountancy · 2012
EXECUTIVE SUMMARY * Organizations with fewer than 100 employees significantly trail their larger counterparts in the implementation of formal antifraud controls, according to a worldwide survey by the Association of Certified Fraud Examiners (ACFE). Antifraud experts say formal controls can help small businesses prevent and detect instances of fraud that, left undiscovered, could lead to costly losses and possibly to bankruptcy. * Antifraud controls don't have to be expensive. Experts say instituting a formal code of com duct, having management review processes and controls, and providing antifraud training to employees are cost-effective ways to help small businesses with limited resources prevent fraud. * Fraud concerns don't appear likely to abate. Seventy-nine percent of CPAs responding to the AICPA's 2011 Forensic and Valuation Services (FVS) Trend Survey said they expect greater demand for services over the next two to five years. * Computers and smartphones are particularly susceptible to fraudulent activity. Forensic and valuation accountants expect a significant increase in hiring of computer forensics personnel in the next two to five years, according to the FVS Trends report. Users of smartphones are seeing data compromised when they log on to unfamiliar networks. ********** [ILLUSTRATION OMITTED] Small businesses are significantly more likely than their larger counterparts to neglect instituting basic antifraud controls that could save them from costly losses, a recent worldwide survey shows. Organizations with fewer than 100 employees were significantly outpaced by larger organizations in every fraud control measured in the Association of Certified Fraud Examiners (ACFE) 2012 Report to the Nations on Occupational Fraud and Abuse, which was released in May. ACFE's global fraud study found: * Just 56% of organizations with fewer than 100 employees represented in the survey underwent external audits of their financial statements, compared with 91% of businesses with 100 or more employees. * Employees received fraud training at just 18.5% of small organizations in the survey, compared with almost six in 10 larger organizations. * Management certification of the financial statement occurred at 43% of small organizations in the survey, compared with 81% of larger ones. * Formal codes of conduct existed at just 50% of organizations with fewer than 100 employees in the survey, compared with 90% of organizations with 100 or more employees. The percentage of small organizations that have formal controls in place is just so dwarfed by the large organizations, Andi McNeal, CPA, the ACFE's director of research, said. And we noticed a real opportunity for small organizations to invest in simple measures, even a code of conduct, which frankly shouldn't cost more than a handful of hours of employees' time. ACFE Report to the Nations was one of two studies released in May that provided substantial perspective on fraud. AICPA's 2011 Forensic and Valuation Services (FVS) Trend Survey found that demand for tech-savvy forensic and valuation CPAs is soaring as computers play an increased role in fraud. VALUE IN VIGILANCE In the ACFE study, available at acfe.com, businesses with fewer than 100 employees often lacked formal controls and were shown to be three times more likely than their larger counterparts to discover instances of fraud by accident. Smaller businesses were almost twice as likely to discover fraud when notified by police and were not nearly as likely to uncover fraud through an internal audit. In the online survey completed by 1,388 Certified Fraud Examiners (CFEs) in late 2011, the ACFE asked respondents to provide a detailed narrative of the largest occupational fraud case they had investigated and completed since January 2010. results of these fraud cases were used to compile the survey and illustrate a point championed by internal control advocates. …