Fraud In Small Business - Part 1

December 11, 2014

Many times the question is asked, "Is fraud really a problem in a small business?" It is important to recognize that fraud occurs in every type of organization...large, small, profit, non-profit, rural towns, or big cities. Dishonest employees exist everywhere. Interesting enough, most frequently, it is a valued, trusted employee, not a new employee, who commits a dishonest act in a business. It is because there is a lack of controls combined with trust of long-term employees. This is the case in many small businesses since employees are few in number and relationships become almost like family members.

Fraud Losses

While large businesses can sustain a fraud loss, it is difficult and, at times, impossible for a small business to recover from a devastating loss. In a major fraud study, it was 18 months before a fraud was detected. The longer a perpetrator works for a business, the higher the fraud loss usually is since the individual involved can learn all the "ins and outs" of how to commit fraud, and how not to be detected.

Fraud Triangle

There is an expression referred to as the "fraud triangle." These are fundamental reasons why someone commits fraud. The three parts of the fraud triangle are (1) opportunity, (2) motive or pressure, and (3) rationalization. 

Opportunity

Opportunity usually exists do to weak or a complete lack of controls in a business. Many times this happens when there is no segregation of duties. When opportunities are decreased, then the chance of someone committing fraud is, also, reduced. 

Motive or Pressure

Motive or pressure can be simply satisfying basic needs, greed, or power. Since these factors vary among individuals, motive or pressure is difficult to predict. In a business situation, opportunities can be reduced as much as possible; however, individual motives and pressures are normally out of the control of owners and managers.

Rationalization

Rationalization refers to how individuals rationalize illegal or unethical behavior. This might be a feeling of entitlement: "I'm entitled to more money." "My boss is making too much money." "I didn't get that bonus I was entitled to get." Someone might be able to, also, rationalize by thinking the committed fraud might just be a temporary situation that will soon be rectified (of course that never happens), or something that was previously acceptable in the business but has now changed.

Be Aware

When all three factors of the fraud triangle are present, it doesn't mean someone will commit fraud, but the perfect storm may be brewing. Understand the elements of fraud to better protect your business.

 

Posted by Richard Weinberger, PhD, CPA
Chief Executive Officer
Association of Accredited Small Business Consultants



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